Should You Buy Mortgage Discount Points?
When obtaining a mortgage loan, lenders often offer the option to "buy down" your interest rate by paying discount points upfront at closing. One point equals 1% of your total mortgage loan amount and typically reduces your interest rate by 0.25%.
Frequently Asked Questions
What are mortgage discount points?
Mortgage discount points (or mortgage points) are upfront fee payments made directly to a lender at closing in exchange for a reduced mortgage interest rate over the life of the loan.
How much does 1 mortgage point cost?
One mortgage point costs 1% of the total loan amount. For example, buying 1 point on a $300,000 mortgage costs $3,000 upfront at closing.
How much does 1 point lower your interest rate?
As a general industry benchmark, 1 discount point lowers your mortgage interest rate by approximately 0.25% (25 basis points), though exact reductions vary by lender and market conditions.
How is the break-even period calculated for mortgage points?
The break-even point in months = (Upfront Cost of Points / Monthly Payment Savings). For example, if points cost $3,000 upfront and save $50 per month, the break-even period is 60 months (5 years).
When is buying mortgage points worth it?
Buying mortgage points is worth it if you plan to stay in the home and keep the same mortgage past your calculated break-even period without refinancing.
When should you NOT buy mortgage discount points?
You should not buy points if you plan to sell the home, move, or refinance the mortgage before reaching your break-even period, or if you need to conserve cash for closing costs.
Are mortgage discount points tax-deductible?
Yes. In most cases, discount points paid on a primary home purchase are fully tax-deductible as prepaid mortgage interest in the tax year paid.
What is the difference between discount points and origination points?
Discount points are optional payments used to lower your interest rate. Origination points are mandatory fees charged by the lender to cover loan processing and administrative costs.
Sources & References
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