When shopping for a mortgage, you'll often see rates quoted with different point options—"6.5% with zero points" or "6.25% with one point." Discount points are upfront fees you pay to lower your interest rate, essentially prepaying interest for a reduced rate over the loan's life. Whether this trade-off makes sense depends on how long you'll keep the mortgage.
How Points Work
One discount point equals 1% of your loan amount. On a $300,000 mortgage, one point costs $3,000. In exchange, lenders typically reduce your interest rate by about 0.25%—though this varies by lender and market conditions.
At 6.5% with no points, your $300,000 loan has a monthly principal and interest payment of $1,896. Pay $3,000 upfront (one point) to get 6.25%, and your payment drops to $1,847—a savings of $49 per month. Simple math: $3,000 ÷ $49 = 61 months (about 5 years) to break even. After that, you're saving money every month.
You can often buy fractional points (like 0.5 points) or multiple points for even lower rates. Each additional point reduces the rate further, but with diminishing returns—the first point saves more than the second.
When Buying Points Makes Sense
Points make sense when you'll keep the loan long enough to break even. If you're buying a forever home and plan to stay 10+ years without refinancing, points can yield substantial savings. You're essentially locking in a guaranteed return on your upfront investment.
If you'll sell or refinance within a few years, points usually don't make sense. Moving after three years means you never reach the break-even point—you would have been better off with the higher rate and keeping your $3,000.
Consider your alternative uses for the money. That $3,000 in points might yield a 5% "return" (in the form of interest savings) over your expected hold period. Could you earn more investing it elsewhere? If you'd put it in an account earning 4%, points still win—but the comparison matters.
Lender Credits: The Opposite of Points
Lender credits work in reverse: you accept a higher interest rate in exchange for credits that reduce your closing costs. This is useful when you're cash-constrained and need to minimize upfront expenses, or when you plan to sell or refinance quickly.
If you'll only keep the loan three years, a 0.25% higher rate might cost you less than paying full closing costs. Run the numbers: higher payment × 36 months versus closing cost savings. Lender credits can make short-term ownership more affordable.
Ask your lender for quotes at different point levels: with points, at par (no points), and with lender credits. This lets you compare total costs over your expected ownership period and choose the option that makes the most financial sense.