Mortgage discount points are upfront fees you pay to your lender at closing in exchange for a permanently lower interest rate. One point costs 1% of your loan amount and typically reduces your rate by 0.25%. On a $400,000 loan, one point costs $4,000 and saves about $60/month. The breakeven point is approximately 5.5 years. Points are a form of prepaying interest -- they make sense when you plan to stay in the home longer than the breakeven period.
How Points Work
Points are expressed as a percentage of the loan. 1 point = 1% of loan amount. On a $400K loan: 1 point = $4,000. You pay this at closing. In return, your rate is reduced by approximately 0.25% for the life of the loan. Some lenders offer partial points (0.5 point for 0.125% reduction).
Calculating Your Breakeven
Formula: cost of points / monthly savings = months to breakeven. Example: $4,000 cost / $60 monthly savings = 67 months (5.5 years). If you keep the loan longer than 5.5 years, the points save you money. If you sell or refinance before, you lose.
Points vs No Points -- 10-Year Comparison
$400K loan comparison:
- Without points:6.5% rate, $2,528/month
- With 1 point ($4,000):6.25% rate, $2,463/month
- Monthly savings:$65/month
- Over 10 years:$7,800 savings - $4,000 cost = $3,800 net benefit
- Over 5 years:$3,900 savings - $4,000 cost = -$100 net loss
The breakeven is clear: if you stay past 5.5 years, points pay off. If you leave earlier, you lose money.
How Many Points Can You Buy?
Most lenders allow 0-3 points. Some allow more. Each additional point typically reduces the rate by another 0.25%. The marginal benefit stays roughly constant.
Can the Seller Pay for Points?
Yes, through seller concessions. On FHA, up to 6% of purchase price. On conventional, up to 3-9% depending on LTV. Using seller money for points is a smart negotiation strategy.
Points vs Lender Credits -- The Opposite
Points: pay more upfront, get lower rate. Lender credits: accept higher rate, get money back at closing. Points are for long-term holders. Credits are for short-term owners or cash-tight buyers.