Mortgage discount points (also called "buying down the rate") are an upfront fee paid to your lender at closing in exchange for a permanently lower interest rate on your loan. One point equals 1% of the loan amount. Paying points is essentially a form of prepaid interest — you pay more now to pay less every month for the life of the loan.
How Points Lower Your Rate
The rate reduction per point varies by lender, loan type, and market conditions, but a common rule of thumb is 0.25% rate reduction per point. On a $400,000 loan, one point costs $4,000 and might reduce your rate from 7.0% to 6.75%. That rate reduction saves roughly $65 per month on the principal and interest payment. Lenders publish a rate sheet showing available rate/point combinations — it is always worth requesting multiple quotes.
Calculating the Break-Even Period
Break-Even Months = Upfront Cost of Points / Monthly Payment Savings
Using the example above: $4,000 / $65 = 62 months, or about 5.2 years. If you plan to keep the loan for longer than that, buying points makes financial sense. If you expect to sell or refinance before the break-even point, you are better off taking the higher rate and keeping your cash. Use the Points Break-Even Calculator to model your specific scenario.
When Buying Points Makes Sense
Points are most beneficial when you have a long time horizon (staying in the home 7+ years), expect interest rates to stay flat or rise (making refinancing unlikely), and have sufficient cash at closing that paying points does not strain your reserves. They are generally not worth it if you are buying an adjustable-rate mortgage, have limited savings for emergencies, or are likely to move or refinance within a few years.
Origination Points vs Discount Points
Not all "points" are discount points. Origination points are a lender fee for processing your loan — they do not reduce your rate. Always clarify whether points on a loan estimate are origination fees (cost of doing business) or discount points (prepaid interest that lowers your rate). Compare total loan costs using the Mortgage Calculator to see the true difference over your expected hold period.