Mortgage Points: Buying Down Your Interest Rate

How paying extra cash upfront can lower a mortgage's interest rate, and the math behind deciding whether it's worth it.

Most home buyers know a mortgage has an interest rate attached to it, discussed in the fixed versus adjustable rate lesson elsewhere in this module. Fewer know that the rate offered isn’t always fixed and final - lenders often let a borrower pay extra money upfront specifically to lower it. That’s what a mortgage point does, and deciding whether to buy one is a genuine, calculable financial tradeoff.

What a point actually is

One mortgage point, also called a discount point, typically costs 1% of the total loan amount, paid upfront at closing, and in exchange it typically lowers the loan’s interest rate by roughly a quarter of a percentage point, though the exact terms vary by lender. Points are optional - a borrower can decline them entirely and simply accept the standard offered rate - but for buyers with enough cash on hand, they’re a real way to reduce the total interest paid over the loan’s life.

Paying now to save later

Imagine a $300,000 mortgage offered at 6.5%. Buying one point costs 1% of $300,000, or $3,000, upfront, and lowers the rate to 6.25%. On a 30-year loan, that quarter-point reduction lowers the monthly payment by roughly $45. It would take about 67 months - a little over five and a half years - of that $45 monthly savings to recover the initial $3,000 cost. After that point, every additional month in the home represents genuine net savings from having bought the point.

The break-even period is the whole decision

The key number in deciding whether points are worth buying is the break-even period: how long it takes for the accumulated monthly savings to equal the upfront cost of the point. If a borrower plans to stay in the home, and keep the same loan, well beyond the break-even period, buying points can genuinely save real money over time. If they expect to sell the home or refinance the loan before reaching that break-even point, the upfront cost is simply lost, since the monthly savings never had time to add up to enough to offset it.

Why lenders offer this tradeoff at all

From a lender’s perspective, points let them collect part of their expected profit upfront in cash rather than spread out gradually across years of interest payments, which can be useful to a lender managing its own funding needs. This is also why points are negotiable and why the exact rate reduction per point varies - it reflects, in part, current market interest rates and how much a lender values receiving money now versus later.

Buying points without a realistic sense of how long you'll keep the loan

Buying points is a bet on staying in the loan long enough to pass the break-even period. Life circumstances change often - a job relocation, a growing family needing more space, a decision to refinance if rates drop later - and any of these can turn what looked like a smart upfront investment into an unrecovered upfront cost.

How points interact with the rest of the loan

Because a mortgage is repaid through amortization - a schedule where each payment covers a mix of interest and principal, weighted heavily toward interest in the early years - a lower rate from points compounds its savings the longest for borrowers who hold the loan the longest, making the break-even calculation more favorable the further out a borrower genuinely plans to keep the loan in place.

Key takeaways

A mortgage point is an optional upfront payment, typically 1% of the loan, that lowers the interest rate.
The break-even period is how long it takes monthly savings from the lower rate to recover the point's upfront cost.
Points only pay off if the loan is held well beyond the break-even period.
Selling or refinancing before break-even means the upfront cost of the point is essentially lost.
Points let lenders collect part of their expected profit as cash upfront instead of spread across future interest payments.
Deciding whether to buy points requires a realistic estimate of how long you'll actually keep the loan.