What Are Mortgage Points and How Do They Work?

When Is It Worth It to Buy Mortgage Points?

Whether mortgage points are worth buying depends on your budget for the upfront cost, potential monthly savings, and how long you expect to keep the loan. Consider these factors before deciding whether paying more at closing makes sense for your situation:

• You plan to stay in your home for a while: You need to stay long enough for the monthly savings to outweigh the upfront cost. The longer you remain in your home, the greater the savings.
• Your credit score doesn't qualify you for a lower rate: A higher rate makes borrowing more expensive, not just monthly but over time. Buying points could help make your loan more affordable.
• You have a substantial amount of cash to put down: If you can afford the cost, prepaying interest can make sense. You use your money now to save yourself more money in the future.
• You want lower monthly payments: Buying points can reduce your monthly mortgage cost, giving you more wiggle room in your budget.

Keep in mind that buying points may not be the best fit if you don't have enough in your homebuying budget to cover the upfront cost in addition to your down payment and closing costs. Consider your available funds and how long you expect to keep the mortgage before deciding.

Calculating Your Break-Even Point with Mortgage Points

Calculating your break-even point is critical before buying mortgage discount points.  You break even when you’ve saved enough from  your lower monthly payments to cover the cost of buying the points.

If you don’t plan on staying in your home or mortgage long enough to at least break even, it probably doesn’t make financial sense to spend thousands of dollars to prepay interest with mortgage discount points.

In the example above with the $450,000 loan, if someone buys one point, they save $73.58 per month based on how much their point lowers their payment. However, they’ve spent $4,500 upfront to reduce their costs. At a rate of $73.58 per month, it would take them 62 months to break even $4,500/$73.58). They’d need to plan to stay in their home, without refinancing, for just over five years to break even.

Pros and Cons of Buying Mortgage Discount Points

Mortgage discount points require you to pay more upfront in exchange for a lower interest rate, which can reduce your monthly payment and potentially save you a lot of money over time. However, the savings depend on factors such as how long you keep the loan and how much cash you have available upfront. Here are some potential pros and cons to consider:

Mortgage Discount Point FAQs

If you want to know more about points on a mortgage, here are answers to some frequently asked questions.

Are Mortgage Discount Points Tax-Deductible?

Mortgage discount points may be tax-deductible, but you’d need to itemize on your taxes rather than claim the standard deduction. There are also other requirements you must meet to deduct points, so you should check with a tax advisor before claiming a deduction. Consult a tax advisor regarding the deductibility of interest and charges.

Are Mortgage Discount Points the Same as Origination Points?

Mortgage discount points aren’t the same thing as origination points which are more commonly called origination fees. Lenders may charge origination fees to help offset the cost of originating loans and are not optional. Mortgage discount points are optional and allow you to prepay interest by paying a percentage of your loan upfront to reduce the interest rate.

Can You Negotiate Discount Points?

You can negotiate whether to pay discount points. Lenders sometimes add points to rate quotes because that makes their quote lower. However, you don’t necessarily have to buy the number of points that a lender suggests. It depends on what type of financing you qualify for, your lender’s requirements, and whether paying for points makes financial sense for you.

Final Thoughts: When to Buy Mortgage Points

If you plan to remain in your home for a long time, buying mortgage points to reduce your interest rate may make sense. You can save money over the long run with lower monthly payments, giving you more flexibility in your budget.

However, if you believe rates will go down and you may want to refinance, or if you plan to move soon, paying the upfront cost for points likely isn’t worth it. Always consider your long-term plans and calculate your break-even point before deciding to buy points.

If you’re ready to get started on a mortgage, reach out to Freedom Mortgage to find out about loan options and speak with a loan professional to decide if buying points can save you money and is right for you.