Should I Pay Points?

When you're applying for a mortgage, one of the decisions you might face is whether or not to pay points, also known as discount points. Points are fees you pay upfront to reduce your mortgage interest rate, often called "buying down the rate." While it might sound like a smart way to save money, whether or not you should pay points depends on your financial situation, how long you plan to stay in the home, and the loan terms.

What are Discount Points?

Discount points are essentially a way to pay some of the interest on your loan upfront in exchange for a lower rate over the life of the loan. One point typically costs 1% of your loan amount. So, on a $300,000 loan, one point would equal $3,000. In return, your lender may reduce your interest rate by around 0.25% for each point you pay. The exact rate reduction can vary depending on the lender and market conditions.

Paying points creates a trade-off: you pay more now to potentially save more later. But whether that trade-off is worthwhile depends on your financial situation and how long you plan to stay in the home.

Why You Might Consider Paying Points

One of the main reasons borrowers choose to pay points is to reduce their monthly mortgage payments. A lower interest rate means less interest accrues on your loan, resulting in smaller monthly bills. Over time, this can add up to substantial savings.

Another benefit is the overall interest you’ll save over the life of the loan. If you plan to stay in your home for many years, the initial cost of the points can be offset—and often surpassed—by the long-term savings.

There can also be a potential tax benefit. In many cases, mortgage points are tax-deductible, particularly if the loan is for your primary residence. However, tax rules can be complex, and deductions vary based on your individual financial situation, so it’s best to consult a tax advisor before making assumptions.

If you are interested in buying down your rate, check out our Rate Buydowns page.

Why You Might Skip Paying Points

The biggest drawback to paying points is the upfront cost. Closing on a home already involves significant expenses such as down payments, appraisal fees, and closing costs. Adding thousands of dollars for points can strain your budget or leave you with less cash on hand for emergencies, moving expenses, or home improvements.

Another consideration is how long you plan to own the home. If you sell or refinance the mortgage before reaching what’s called the break-even point, you won’t have saved enough from the lower monthly payments to make up for what you paid in points. In that case, you could end up losing money rather than saving it.

It's also worth considering whether that cash could be better used elsewhere. For example, putting it toward a larger down payment can reduce your loan amount, potentially lowering your interest costs in another way. Or you might prefer to invest the money or keep it in savings for flexibility.

How to Find Your Break-Even Point

To decide whether paying points is worthwhile, it’s helpful to calculate the break-even point. This is the number of months it will take for the monthly savings from your lower interest rate to equal the amount you paid in points.

Here’s a simplified example: Suppose you’re borrowing $300,000. You can get a 7.0% rate with no points or a 6.75% rate by paying one point ($3,000). If the lower rate saves you $50 per month, it will take 60 months—five years—to recover your upfront cost. Staying longer than five years would result in net savings.

The Bottom Line about Discount Points

Whether or not to pay mortgage points is a personal decision based on your financial goals, available cash, and how long you expect to stay in the home. If you have the funds available and plan to stay in your home for many years, paying points could lead to significant savings. But if you're uncertain about your long-term plans or would rather keep your upfront costs low, skipping the points might be the smarter move.

Before you make a decision, ask your lender to provide a quote with and without points. This decision isn't just about what you can afford now—it's about what makes the most sense over time.

How I Can Help You

When it comes time to purchase a home or refinance an existing loan, I want to help you! Hopefully articles like this give you good information and a better understanding of the mortgage world, but let me use my experience and expertise to help you with your particular situation.

I tell my clients and referral partners that a mortgage transaction starts with a simple conversation. Let’s talk about your financial situation, budget, and goals so that I can help you determine the best solution for you. During a 10-minute informal conversation, we can get you on the right path as it relates to a home purchase or mortgage refinance.