How Do Mortgage Points Work?

Buying a home is the largest investment most people will make in their lifetime. And, even though it doesn’t seem like much, saving a few thousand dollars can make a big impact when it comes to maximizing the value of your mortgage. Buying mortgage points—also called “discount points”—is a simple way to potentially save thousands over the life of your loan. Here’s why it could make sense to buy points if you have the financial means to. 

Lower Your Monthly Mortgage Payment

You may have heard of the concept of “buying down” the interest rate on a mortgage or perhaps paying up front for points. They’re one and the same. Both refer to the idea of using mortgage points to your advantage to lower the overall cost of buying a home. 

A point or discount point is a one-time fee equal to 1 percent of your mortgage loan amount. The point is typically included in your closing costs in exchange for a lower interest rate. Your monthly mortgage payment would be calculated using the lower interest rate.

Understanding Mortgage Points

If you can pay more than the minimum down payment on your next mortgage, ask your lender about discount points. By paying a bit more up front, you could save thousands of dollars over the life of your mortgage. 

What are points? 

• Points, also known as discount points, are a fee paid to a lender in advance for a reduced interest rate over the life of your loan. 
• Paying points is also known as "buying down" the interest rate. 

What are points worth? 

• 1 point is worth 1 percent of your mortgage. 
• $1,000 on a $100,000 mortgage would be 1 point. 

How do points help me? 

• Points reduce your monthly payment over the life of your loan.
• A seller may contribute to the cost of your points. 
• Points could also be tax deductible.

How much could I save by purchasing mortgage points?

Determining how much you could save by buying mortgage points—or discount points—depends on many factors, including how long you plan to stay in your home.

Here's an example of how discount points can result in savings over the lifetime of a 30-year mortgage. 

How are origination points different than discount points?

Origination points are fees that some lenders charge when you take out a mortgage. These fees typically cover the cost of processing your application, underwriting your loan and other administrative services. Some lenders—including Navy Federal—don't charge origination fees.

Discount points, also known as mortgage points, are optional fees you could choose to pay in order to lower the interest rate on your loan.

Is it a good idea to buy mortgage points?

Deciding whether to buy mortgage points depends on your circumstances. If you plan to be in your home for the long term and have extra funds available, it could be a good idea.

Since points are an additional cost that you pay up front, it's important to determine your break-even point—how long it will take to recoup the cost. Your lender can help you decide if buying points is right for you.