Mortgage points are a fee you pay the lender upfront to lower your interest rate. One point equals 1% of your loan amount. When you buy mortgage points, you're essentially paying the lender to reduce your monthly interest payments. Most lenders reduce your rate by roughly 0.25% for each point purchased, though it varies by lender.
In this article, we’ll explain how mortgage points are calculated, share real examples with the math broken down, show you how to find your break-even point, and help you assess whether buying points is worth it. Understanding how points work helps you choose the most affordable loan.
What mortgage points are (and why lenders offer them)
It’s easy to confuse mortgage points, also called discount points, with origination points. Here’s how each works:
- Discount points: These are prepaid interest. You pay a fee upfront, and your lender permanently lowers your interest rate.
- Origination points: These are lender fees required to process and underwrite your loan. Origination points do not affect your interest rate in any way.
Lenders offer discount points because it helps them balance their revenue. If you pay more upfront via points, the lender earns a slightly lower yield over time. If you don’t want to pay upfront, they keep the rate higher and earn more interest over the life of the loan.
Let’s say you’re taking out a $350,000 mortgage at a 6.5% interest rate. Your monthly payment (principal and interest) is approximately $2,212. If you buy one point and your lender drops your rate to 6.25%, your payment falls to $2,155. Over 30 years, that’s $20,602 in total savings.
How mortgage points are calculated
In most cases, mortgage points are calculated using this formula:
Cost of Points = Loan Amount × Number of Points
Breaking it down:
- 1 point = 1% of the loan amount
- 0.5 points = 0.5% of the loan amount
- 0.25 points = 0.25% of the loan amount
Here’s how points could be calculated across different loan amounts:
| Loan amount | 0.25 points | 0.5 points | 1 point |
|---|---|---|---|
| $200,000 | $500 | $1,000 | $2,000 |
| $350,000 | $875 | $1,750 | $3,500 |
| $500,000 | $1,250 | $2,500 | $5,000 |
Here are other examples:
On a $300,000 loan:
- 0.25 points = $750
- 1 point = $3,000
- 1.5 points = $4,500
On a $450,000 loan:
- 0.75 points = $3,375
- 1 point = $4,500
- 2 points = $9,000
How much does 1 mortgage point reduce your rate?
There's no universal answer because the rate reduction varies by lender, loan type, market conditions, and your credit profile. One point typically reduces your rate by approximately 0.25%. However, most lenders generally offer 0.125% to 0.375% per point.
Here’s a quick overview of rate changes at different points:
| Points purchased | Interest rate |
|---|---|
| 0 points | 6.5% |
| 1 point | 6.25% |
| 2 point | 6.0% |
| 3 points | 5.75% |
Always ask your lender for their specific rate sheet showing exactly how much each point buys down your rate.
Example: Mortgage points calculation step-by-step
Below are two examples showing exactly how buying points changes your payment.
Example 1: Purchase loan (1 point)
Let’s say you borrow a $350,000 loan with a 6.5% interest, and you have the option to buy one mortgage point. In most cases, the lender will require you to pay 1% of the loan amount ($3,500) for the discount point. They’ll then reduce your interest rate from 6.5% to 6.25%.
Here’s how much you’d save:
| Without points | With 1 point | |
|---|---|---|
| Interest rate | 6.5% | 6.25% |
| Cost of points | $0 | $3,500 |
| Monthly payment (principal + interest) | $2,212 | $2,155 |
| Monthly savings | $0 | $57 |
Example 2: Refinance loan (2 points)
Let's say you’re refinancing your mortgage and you qualify for a $280,000 loan. If you buy two discount points, that would cost you $5,600. Here's how much you’d save with this option:
| Without points | With 2 points | |
|---|---|---|
| Interest rate | 6.5% | 6.0% |
| Cost of points | $0 | $5,600 |
| Monthly payment (principal + interest) | $1,770 | $1,679 |
| Monthly savings | $0 | $91 |
Break-even analysis: When buying points actually saves money
Buying points only makes sense if you’ll be in the home long enough to recover the upfront cost. That’s why knowing when you’ll break even is important.
To calculate your break-even point, use the formula:
Break Even (Months) = Cost of Points ÷ Monthly Savings
For example:
- Cost of points = $3,000
- Monthly savings = $90
- Break-even = 33 months (~2.75 years)
How long you plan to live in the home will determine whether buying points is worth it.
If you’re planning to stay in the property for less than three years or plan to sell or refinance soon, skip points. You may not manage to break even, depending on the number of points you purchase. But if your goal is to stay in the home longer or keep your current loan, mortgage points are worth considering.
Points can also make sense with higher loan amounts, where monthly savings add up faster.
Rate environment also matters. If rates are dropping and you might refinance soon, paying for points locks you into a rate that you could abandon. If rates are high and there’s no indication they’ll fall anytime soon, then buying points makes more sense.
For adjustable-rate mortgages (ARMs), points only affect the initial fixed period.
Mortgage points vs. origination fees
Mortgage points and origination fees are costs lenders may charge you when taking out a mortgage, but they serve different purposes.
Lenders charge origination fees for processing and underwriting your loan. The fees do not affect your interest rate in any way.
On the other hand, mortgage points are prepaid interest that you pay upfront to lower your interest rate over the life of the loan.
Negative points (lender credits) explained
Negative points are the opposite of discount points. Instead of paying the lender to reduce your rate, the lender pays you (via a credit) in exchange for accepting a higher interest rate.
In most cases, the credit lowers your closing costs. This is useful for cash-strapped buyers.
For example:
- Loan amount: $300,000
- Base rate: 6.50%
- Rate with 1 point: 6.75%
- Lender credit: $3,000
The $3,000 covers part of your closing costs. However, lowering your closing costs today and paying a higher lifetime interest rate may not be a smart move.
When buying mortgage points makes sense (and when it doesn’t)
Mortgage points make sense in some specific situations, but in others, you’re better off not buying points.
When points makes sense
- You plan to stay in the home past break-even: Because paying for points reduces your rate over the life of the loan, the longer you stay, the more the upfront cost will be worth it.
- You have a high loan amount: The larger your loan amount, the more you’ll save over time.
- You have extra cash after emergency fund and moving expenses: If you have spare cash after covering your down payment, setting aside moving expenses, and fully funding your emergency fund, paying for points can make sense.
- Rates are high enough that a buy-down creates meaningful savings: If current mortgage rates are high enough to justify the upfront cost to get a lower rate, go for it.
When points don’t make sense
- You expect to sell/refi within a few years: If you plan to sell or refinance soon, you may not hit your break-even point.
- You need cash for repairs, reserves, or closing costs: It doesn’t make sense to buy points when you don’t have money to cover such costs.
- You’re using down payment assistance: Down payment assistance programs often reduce your upfront expenses and sometimes restrict additional fees.
- ARMs with short fixed periods: If your adjustable-rate mortgage has a short fixed introductory period, like a 5/1 ARM, you may want to skip points.
Mortgage points on refinances
Yes, you can buy points when refinancing. Points can make refinancing worth it if you are in high-rate markets where you want to lock in future savings. But points may be less helpful when rates are falling and you could refinance again in the near future.
The reason why mortgage points on refinances behave differently than purchase points is the amortization schedule resets when you refinance. That means early payments go toward interest all over again.
Mortgage points vs. making a bigger down payment
Both reduce your long-term cost, but in different ways.
A larger down payment lowers your loan-to-value (LTV) ratio, can reduce private mortgage insurance (PMI), and can potentially secure a better rate. Mortgage points reduce your rate over the life of the loan and lower your monthly payments. So which one gives you a better return?
It depends on your cash-on-hand and how long you’ll keep the loan:
- If dropping from 90% LTV to 80% eliminates PMI, a larger down payment may win.
- If PMI is already low or you’re staying long-term, points may give a higher return.
The bottom line
Mortgage points are calculated by multiplying your loan amount by the percentage of points you buy. One point equals 1% of your loan. That’s why comparing lenders matters: The impact of 1 point varies significantly.
Buying points is just one piece of the puzzle. The lender you choose, the rate you’re offered, and how your agent structures your offer can all change whether points make sense.
Clever Real Estate can connect you with a top local buyer’s agent who knows how to help you compare lenders and decide if paying for points fits your budget and timeline. Eligible buyers may even qualify for cash back after closing, putting some money back in your pocket when you need it most.
FAQ
How do you calculate mortgage points?
One point equals 1% of the loan amount. Multiply the loan amount by the number of points you buy. For example, one point on a $350,000 loan costs $3,500.
How much is 1 point on a mortgage?
One point is 1% of your loan amount. On a $250,000 loan, that's $2,500. On a $500,000 loan, it's $5,000.
How much is 2 points? 3 points?
Two points equal 2% of your loan amount. Three points equal 3%. For a $400,000 loan, two points cost $8,000 and three points cost $12,000.
How much does 1 point lower your mortgage rate?
It lowers by 0.25%, but it varies by lender and loan type. Some lenders offer 0.125% to 0.375% per point. Always ask for the specific rate sheet.
Can you buy mortgage points at any time?
No. You can only buy mortgage points at closing when you originate or refinance your loan.
Can you buy points on an FHA, VA, USDA loan?
Yes. Government-backed mortgages allow points, but rules vary.
How do negative points work?
Negative points give you credit toward your closing costs in exchange for a higher interest rate.
Is buying mortgage points tax deductible?
Discount points may be deductible as mortgage interest, but the rules are strict. It’s best to speak to a tax professional.
