Understanding Mortgage Points: Should You Buy Them Down?
Confused about mortgage points? This guide explains how they work, when it makes sense to buy them, and how they can save you money over the life of your loan.
If you're shopping for a mortgage, you’ve likely heard the term “buying points” or “mortgage points.” But what does it mean — and is it worth the cost?
In this guide, we’ll break down what mortgage points are, how they affect your interest rate and monthly payment, and when it makes sense to use them to buy down your rate.
What Are Mortgage Points?
Mortgage points (also called discount points) are upfront fees you pay to your lender in exchange for a lower interest rate.
- 1 point = 1% of your loan amount
- Typically lowers your interest rate by about 0.25% per point (varies by lender)
Example: On a $300,000 mortgage:
- 1 point = $3,000
- Might lower rate from 6.5% to 6.25%
How Do Points Affect Monthly Payments?
Let’s look at a comparison:
| Scenario | Rate | Monthly Payment | Total Interest (30 Years) |
|---|---|---|---|
| No Points | 6.5% | $1,896 | $382,633 |
| 1 Point | 6.25% | $1,847 | $365,582 |
You’d pay $3,000 upfront but save $49/month — and over $17,000 in total interest.
The breakeven point would be around 5 years — if you stay in the home longer, the savings add up.
When Does It Make Sense to Buy Points?
Yes, consider points if:
- You plan to stay in the home long-term
- You have extra cash for upfront costs
- You want a lower monthly payment
🚫 Skip the points if:
- You plan to move or refinance within a few years
- You’re short on cash for closing
- You qualify for a low-rate loan without points (VA, FHA, etc.)
How to Calculate Your Breakeven Point
Use this formula:
Cost of Points / Monthly Savings = Breakeven in Months
Example:
- Cost: $3,000
- Monthly Savings: $49
- $3,000 / $49 = ~61 months (~5 years)
If you’re unsure how long you’ll keep the mortgage, it may be too risky.
Are Points Tax-Deductible?
Yes — in many cases.
- Mortgage points may be tax-deductible as mortgage interest (consult your tax advisor)
- Deduction often applies if the loan is used to buy or build your main home
- You must itemize your deductions to claim them
Tips for Smart Use of Mortgage Points
- Compare lenders — some offer better rate reductions per point
- Ask for scenarios with and without points
- Negotiate — some lenders may offer partial credits toward points
- Balance priorities — if cash is tight, a higher rate may make more sense
Final Thoughts
Buying mortgage points can be a smart way to save money if you plan to stay put and can afford the upfront cost.
But like all things in personal finance, it depends on your goals, timeline, and cash flow.
Before you buy points:
- Run the numbers
- Ask your lender for breakeven analysis
- Factor in other closing costs and savings goals
The right move is the one that works for your financial future — not just the lowest number on paper.