For many buyers, saving enough for a down payment and closing costs can feel like a big hurdle. Then, somewhere in the process, they hear: “You could lower your interest rate by buying mortgage points.”
At that moment, the questions start coming: What are mortgage points? How much do they cost? Should I use some of my down payment funds to buy them?
Let’s take a closer look at what mortgage points are, how they work, and how to decide whether they’re a smart move for you or your clients.
What Are Mortgage Points?
Mortgage points are fees paid directly to the lender at closing. There are two main types:
Origination Points: These are fees charged by the lender for processing the loan. Not all lenders charge them, and some are negotiable.
Discount Points: These represent prepaid interest — you pay upfront to lower your mortgage interest rate for the life of the loan.
Each point typically costs 1% of the loan amount. So, on a $250,000 mortgage, one point would cost $2,500. You’ll see them clearly itemized on both the Loan Estimate (received shortly after applying) and the Closing Disclosure (issued just before settlement).
How Discount Points Work
Discount points are the most common type that homebuyers consider. They allow you to “buy down” your interest rate, typically by about 0.25% per point, though that can vary by lender.
Here’s an example based on a $300,000 loan with a 20% down payment:
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Zero Points
Paid at Closing: $0
Interest Rate: 5.5%
Monthly Payment (Principal & Interest): $1,362.69
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Two Discount Points
Paid at Closing: $6,000
Interest Rate: 5.0%
Monthly Payment (Principal & Interest): $1,288.37
That’s a monthly savings of $74.32 — not bad for lowering your interest rate by half a percent.
Finding the Break-Even Point
The key question is: How long will it take to recover the upfront cost of the points through your lower monthly payment?
To find out, divide the cost of the points by the monthly savings:
$6,000 ÷ $74.32 = 80.73 months, or about 6 years and 9 months.
That means you’d need to stay in the home for roughly 7 years before the lower payments start saving you money overall.
If you were to keep the mortgage for the full 30 years, however, those savings would really add up — totaling roughly $26,755 in interest saved over the life of the loan.
Should You Buy Discount Points?
That depends on your plans. If you’re buying a long-term home — somewhere you plan to stay for many years — discount points can make a lot of sense. They can significantly reduce the total interest you’ll pay over time.
But if you think you might sell or refinance within a few years, you probably won’t reach the break-even point before moving on. In that case, those funds might be better used toward your down payment, closing costs, or post-move improvements.
It’s also important to make sure buying points won’t stretch your cash too thin at closing. A smaller down payment could affect your loan-to-value ratio or require mortgage insurance, which could offset some of the benefit of the lower rate.
That’s why it’s so important to review all your options carefully with a trusted mortgage professional — or reach out to Scott and the Smolen Team at RE/MAX Leading Edge, who can help you evaluate your situation and connect you with experienced local lenders.
Bottom Line
Mortgage points can be a powerful tool to reduce long-term borrowing costs — but they’re not the right choice for everyone. Your decision should depend on your financial comfort level, your long-term plans, and how long you intend to keep the loan.
If you or your clients are considering a home purchase in Anne Arundel County or the surrounding area, Scott and the Smolen Team can help you run the numbers, review loan scenarios, and make an informed decision about whether buying points makes financial sense.
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