Pros and Cons of Buying Points on a Mortgage: Is It Worth It?

Written by Elizabeth BoydSeptember 14th, 20227 minute read

Buying mortgage points is a way to lower your interest rate at closing by prepaying some interest upfront. It will also get you a lower monthly mortgage payment and you’ll pay less interest overall throughout the life of your loan. The more points you buy, the lower your interest rate will be.

Many home buyers are averse to buying mortgage points because they either don’t trust the lender or don’t want the extra expense. And it’s true that mortgage points aren’t the best choice for everyone. Here are the pros and cons of buying points on a mortgage so you can decide if it’s the best move for you.

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Jump to section: Pros of buying mortgage points | Cons of buying mortgage points | How buying mortgage points works | How to calculate mortgage points | What are mortgage points? | FAQ

Pros and cons of buying points on a mortgage

Pros

  • Lowers your mortgage interest rate
  • Lowers your monthly mortgage payment
  • Can help you qualify for a bigger mortgage
  • Saves you money on interest over the life of your loan

Cons

  • Substantially increases your closing costs
  • Doesn’t pay off until you hit the breakeven point
  • May not be the most effective investment of available funds
  • Not the best financial move for buyers who plan on moving or refinancing quickly

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Pros of buying points on a mortgage

Lowers your mortgage interest rate and mortgage payment

Each point you buy typically lowers your interest rate by a quarter of a percent. That’s why purchasing discount points is called “buying down the rate.” For example, if your starting rate is 5.75%, you can cut that rate to as low as 5.25% by purchasing two discount points. That might not seem like much, but it adds up when you’re working with big numbers in a mortgage. Knocking your interest rate down will lower your monthly mortgage payment and save you thousands over the life of your loan.

Better qualification odds

A reduced interest rate means smaller mortgage payments. That may help you qualify for a home loan that would otherwise be slightly out of reach because of your debt-to-income ratio.

Let’s say you finance $350,000 through a 30-year fixed-rate home loan with a 5.75% interest rate. The monthly payment on principal and interest is $2,043. So, you decide to buy two discount points ($7,000). Your loan rate drops to 5.25%, and the monthly payment for principal and interest is now only $1,933. The discount points lowered your monthly payment by $110. In some cases, that calculation makes the loan affordable for your budget, helping you leap that last hurdle with the lender.

Saves you money over the life of your loan

A lower interest rate reduces the dollar amount of interest you’ll pay over the life of your loan. Let’s look at that $350,000 mortgage again. With a 5.75% rate, you’ll pay $385,302 in total interest if you make your scheduled payments for 30 years. But when you lower the rate to 5.25% with discount points, the total interest payments will be $352,777 ($345,777 over the 30 years + the $7,000 upfront interest payment via discount points). That’s a total savings of $32,525.

Cons of buying points on a mortgage

Increases your closing costs

The cost of discount points adds up quickly, especially with a large loan. So, you may find yourself paying $4,000, $5,000, or more on discount points instead of towards your down payment and other closing costs. However, if you’re worried about qualifying for a big enough mortgage, focusing on a bigger down payment might be better than a slight interest rate reduction. Run the numbers with your lender to determine which approach fits your circumstances best before you jump to paying for points.

It takes years to break even

The discount points you pay represent upfront interest payments. So, you must remain in your home long enough to "work off" that prepayment and see the savings kick in that comes from paying less interest over the life of your loan. Typically, that takes about five or six years. You won't see a return on buying mortgage points if you sell or refinance your home before you hit the breakeven point, which means you will have paid extra money for nothing.

Funds may be better invested elsewhere

Discount points aren’t cheap. Each mortgage point costs 1% of the total loan (not purchase price). With an average loan amount of $453,000, you’ll probably spend at least $3,000–$7,000 buying points. That’s a big chunk of cash that could do a lot of things that might serve you better than buying mortgage points. You could add that money to your down payment or put it towards closing costs. Paying down high-interest debt on a credit card or installment loan may help your credit situation. If you've already taken care of those issues, investing or putting that money in savings for an emergency might be wiser.

How buying mortgage points works

Buying mortgage points lets you reduce the interest rate on your home loan. Essentially, you’re paying some of the interest on your loan upfront in the form of points. That allows you to pay smaller monthly mortgage payments at a reduced rate.

Every point you buy lowers the rate by about 0.125–0.25%, costing 1% of the total loan amount each. The math can get tricky here, but most lenders also offer points in increments. So, you may be able to buy quarter points or half points. Your lender will give you the exact numbers to calculate the cost of the points versus the amount of rate reduction.

🚨 Shop for your interest rate carefully

Be careful when shopping around for the "lowest interest rate." Some lenders will give you an unbelievable interest rate, but they won’t tell you that there are mortgage points associated with the quoted rate or that the interest rate is not guaranteed. Make sure buying mortgage points is the best option for you before you commit to a loan that requires them.

How to calculate mortgage points

Buying mortgage points can actually save you money over the life of the mortgage. The decision to pay mortgage points is a decision between you and the mortgage company and a good calculator. Here is one example of how buying points will affect your mortgage:

Cost of mortgage with no points

  • Interest rate: 6.00%
  • Term: 30-years
  • Principal and interest payment: $599.55
  • Interest cost: $0 at closing
  • Total interest over life of loan: $ 115,838.19

Now, compare the example above to the calculations below to see how much buying mortgage points could save you.

Mortgage point calculation
One point loan as seen as a pie chart
Loan amount: $100,000
Interest rate: 5.75%
Term: 30 years
Principal & interest payment: $583.57
Mortgage point cost: $1,000 at closing
Total interest over life of loan:
$ 110,086.23
Interest savings: $5,751.96
Two point loan as seen as a pie chart
Loan amount: $100,000
Interest rate: 5.50%
Term: 30 years
Principal & interest payment: $567.79
Mortgage point cost: $2,000 at closing
Total interest over life of loan:
$ 104,404.04
Interest savings: $11,434.15
Three point loan as seen as a pie chart
Loan amount: $100,000
Interest rate: 5.25%
Term: 30 years
Principal & interest payment: $552.20
Mortgage point cost: $3,000 at closing
Total interest over life of loan:
$ 98,793.33
Interest savings: $17,044.86

What are mortgage points?

Mortgage points are fees you pay to a lender to get a lower interest rate. There are two types of mortgage points: discount mortgage points and rebate mortgage points.

Discount mortgage points are the most popular type. Mortgage borrowers purchase discount points from their lenders to lower the interest rate on their home loans.

Rebate mortgage points, also called negative points, are less common. They apply when you need more cash to cover your closing costs. For example, if you don't have the funds to pay your closing costs, you may get a loan that allows you to finance them with your mortgage. But the lender raises your interest rate to pay for those costs. The rebate points represent the increased rate percentage.

FAQ about buying mortgage points

You can lower your mortgage rate by improving your credit score, making a bigger down payment, shopping around to multiple lenders, or buying mortgage points. Buying mortgage points is one of the most straightforward ways to lower your mortgage rate when you take out a loan, but you pay for the privilege.

Yes, mortgage points are included as part of closing costs. Buyers pay for their mortgage discount points at settlement. Your lender will disclose the proposed amount and other closing costs in a three-page loan estimate form after applying. You’ll also get a Closing Disclosure at least three business days before closing, with itemized closing costs.

Yes, the lender can pay your discount points. Mortgage lenders are permitted by the loan programs to buy down your interest rate. Lender-paid discount points is an easy way to lower your interest rate, provided you can find a willing lender.

Yes, the mortgage programs (FHA, VA, USDA, and conventional) permit the seller to pay a percentage of the buyer's closing costs, including mortgage points (seller assist). Mortgage points can reduce your monthly payment even though the mortgage amount is higher. For example, if the seller is willing to sell you a house for $100,000 and you obtain a no point loan at 5%, your monthly payment for a 30-year-fixed-rate term is $536.82 (principal and interest). But if you make a better offer for $103,000 and ask the seller to pay 3 points, the mortgage points lower your interest rate and bring down your monthly payment to $506.70.

There is no limit on how many mortgage points you can buy, but the impact of mortgage points on the interest rate tends to deteriorate after 3–4 mortgage points.