Are Mortgage Discount Point Worth It?

It depends! First and foremost, it’s important to consider how long it will take to recoup the cost of the points that you’ve paid for. If you plan on staying in your home for a while, you are more likely to make up for the money you’ve spent on points. Finally, if your credit score isn’t high enough to qualify for a lower rate, mortgage discount points might make your monthly interest a little cheaper.

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What Are Mortgage Discount Points?

Q: How Are Mortgage Discount Points Calculated?

One point costs one percent of your loan amount (or $1,000 for every $100,000). Also, points don’t have to be round numbers, either (1.25 points = $1,250 for every $100,000).

Q: Are Mortgage Discount Points Tax Deductible?

Yes, mortgage discount points are eligible for tax deductions, but there are additional requirements you must meet from the IRS. Consult a tax advisor regarding tax implications and the deductibility of mortgage discount point fees.

Decide If Paying for Discount Points Is Right for You

Mortgage discount points are paid upfront to reduce your interest rate. You can save money in the long run by buying mortgage points, but your initial costs will be much higher. Before you purchase mortgage points, you need to understand how they work and when they make sense. This guide will explain the details.

What Are Discount Points on a Mortgage?

Discount points are fees you’ll pay at closing, in exchange for a reduced interest rate. You can think of using mortgage points as paying upfront interest in exchange for a lower interest rate over the life of your loan. The longer you plan to own the home, the more points may help you save on interest over the life of the loan.

How Are Mortgage Discount Points Calculated?

Mortgage discount points are equal to a percentage of the loan amount. Each point you buy typically costs 1% of the loan amount and generally lowers your interest rate by 0.25 percentage points for the life of the loan. You may be allowed to buy partial points or purchase more than one point.

The table below shows how buying mortgage points could affect your interest rate and upfront costs. In this example, you’re borrowing $450,000 and have a 30-year loan term.

	With No Points	With One Point	With Two Points
Interest Rate	6.5%	6.25%	6.00%
Cost of Point	$0	$4,500	$9,000
Monthly Payment (Principal + Interest)	$2,844.31	$2,770.73	$2,697.98
Total Interest Paid	$573,950	$547,462	$521,272
Total Interest Saved	$0	$26,488	$52,678

Are Mortgage Discount Points Worth It?

Now you know what mortgage discount points are, but are they worth it? That's going to depend on your situation. Here are some circumstances when purchasing points on a mortgage could be the right choice:

You plan to stay in your home for a while. You need to stay in your home long enough for the interest savings to be worth the upfront cost. The longer you remain in your home, the better the savings are.
If your credit score doesn't qualify you for a lower rate. A higher rate makes borrowing more expensive, not just every month but over time. If your credit results in a higher rate, buying points could help make your loan more affordable.
If you have a substantial amount of cash to put down. If you have the cash upfront, prepaying interest can make good sense. You can use your money now to save yourself more money later.
If you want lower monthly payments. Buying points can reduce your monthly mortgage cost, giving you more wiggle room in your budget.

It is very important to determine the break-even point before buying mortgage discount points.

Understanding Break-Even with Mortgage Points

Calculating your break-even point is critical before buying points in mortgage closings. It doesn't make sense to spend thousands of dollars to prepay interest if doing so won't ultimately save you money.

You break even when you have saved enough by lowering your monthly payments to make up for the upfront cost of buying the points.

In our above example with the $450,000 loan, if you buy one point, you save $73.58 per month based on how much your point lowers your payment. However, you've spent $4,500 upfront to reduce your costs. At a rate of $73.58 per month, it would take you 62 months to break even $4,500/$73.58).

You would need to plan to stay in your home, without refinancing, for just over five years to break even.

Pros and Cons of Buying Mortgage Discount Points

There are pros and cons associated with buying mortgage discount points.

Pros of Mortgage Discount Points	Cons of Mortgage Discount Points
Can lower monthly mortgage payments Can save money on interest paid over time May be eligible for a tax deduction	Require more cash upfront at closing May not be ideal for people who plan on moving or refinancing before breaking even Reduced financial flexibility since you've locked up more money in your mortgage upfront

Mortgage Discount Point FAQs

If you still want to know more about points on a mortgage, here are the answers to some frequently asked questions.

Are Mortgage Discount Points Tax-Deductible?

Mortgage discount points may be tax-deductible, but you must itemize on your taxes rather than claim the standard deduction. There are also other requirements you must meet to deduct points, so you should check with the IRS or a tax advisor before claiming a deduction.

Are Mortgage Discount Points the Same as Origination Points?

Mortgage discount points are not the same thing as origination points. Origination points are fees charged by some lenders for processing loans. Mortgage discount points are optional and allow you to prepay interest by paying a percentage of your loan upfront to reduce the interest rate.

Can You Negotiate Discount Points?

You can negotiate whether you pay discount points or not. Lenders sometimes add points to rate quotes because that makes their quote lower. However, you do not necessarily have to buy the number of points that a lender suggests. It depends on what type of financing you qualify for, your lender's requirements, and whether you feel paying for points makes sense for you.

Closing Thoughts: When To Buy Mortgage Points

If you plan to remain in your home for a long time without refinancing, buying mortgage points to reduce your interest rate makes good sense -- if you have the cash upfrontto afford to do so. You can save money over the long run and lower monthly payments, which gives you more flexibility in your budget.

However, if you believe rates will go down and you may want to refinance, or if you plan to move soon, paying the upfront cost for points is likely not worth it. Always consider your long-term plans and calculate your break-even point before deciding to buy points.

If you are ready to get started on a mortgage, you can also reach out to Freedom Mortgage to find out about loan options and speak with a loan professional to decide if buying points is right for you.