Discount Points Explained
What they are, how much they typically cost, and how to know whether they're worth it for your situation.
What Are Discount Points?
A discount point is an upfront fee you pay at closing to lower your mortgage's interest rate, sometimes called "buying down" your rate. Each point generally costs 1% of your loan amount and typically lowers your rate by somewhere between 0.125% and 0.25%, though the exact reduction depends on current market pricing at the time of your loan. You can usually buy a fraction of a point, or multiple points, depending on how much you want to bring your rate down.
A Simple Example
On a $300,000 loan, one point would cost $3,000. If that point lowers your rate from 7% to 6.75%, your monthly payment on the loan drops for as long as you keep it. Whether that $3,000 upfront cost is worth it depends entirely on how long you plan to keep the loan, which is where the break-even calculation comes in.
Discount Points vs. Origination Fees
These two are often confused, but they're not the same thing. Discount points are optional and directly lower your interest rate. Origination fees (sometimes called origination points) are a separate, typically non-optional charge that covers the cost of processing your loan, and they don't reduce your rate at all.
Calculating Your Break-Even Point
The break-even point is how long it takes for your monthly savings to add up to what you paid for the points. You get this by dividing the cost of the points by your monthly savings. If your points cost $3,000 and save you $50 a month, your break-even point is 60 months, or 5 years. If you plan to keep the loan longer than your break-even point, points can save you money overall. If you're likely to sell or refinance sooner, they may not pay off.
Is Buying Points Right for You?
Here at Efinity Mortgage, we walk through the actual numbers with you, comparing your rate with and without points, your break-even timeline, and how long you realistically expect to keep the loan, so you can decide with real numbers instead of a guess.
Common Questions
How much does one point cost?
Generally 1% of your loan amount. On a $300,000 loan, one point costs $3,000.
How much will one point lower my rate?
It varies, but it's typically somewhere between 0.125% and 0.25%, depending on market pricing at the time.
Can I buy a fraction of a point?
Yes, in most cases you can buy partial points, like half a point, not just whole numbers.
Are points always worth buying?
Not necessarily. It depends on your break-even point compared to how long you plan to keep the loan.