Mortgage points are fees you pay a lender to reduce the interest rate on a mortgage. Paying for discount points is often called “buying down the rate” and is totally optional for the borrower.

​

How much does one mortgage point reduce the rate?

​

When you buy one discount point, you’ll pay a fee of 1% of the mortgage amount. As a result, the lender typically cuts the interest rate by 0.25%.

​

But one point can reduce the rate more or less than that. There’s no set amount for how much a discount point will reduce the rate. The effect of a discount point varies by the lender, type of loan and prevailing rates, as mortgage rates fluctuate daily.

​

“Buying points” doesn’t always mean paying exactly 1% of the loan amount. For example, you might be able to pay half a point, or 0.5% of the loan amount. That typically would reduce the interest rate by 0.125%. Or you might be given the option of paying one-and-a-half points or two points to cut the interest rate more.

​

How do mortgage points work?

​

Paying discount points reduces the interest rate and therefore the monthly payments. Your monthly savings depends on the interest rate, the amount borrowed and the loan’s term (30-year vs 15-year loan, etc).

​

Should you buy points?

​

If you can afford them, then the decision whether to pay points comes down to whether you will keep the mortgage past the “break-even point.”

​

The concept of the break-even point is simple: When the accumulated monthly savings equal the upfront fee, you’ve hit the break-even point. After that, you come out ahead. But if you sell the home or refinance the mortgage before hitting break-even, you lose money on the discount points you paid.

​

The break-even point varies, depending on loan size, interest rate and term. It’s usually more than just a few years. Once you guess how long you’ll live in the home, you can calculate when you’ll break even.

​