Mortgage Discount Points Explained
Discount points are upfront fees paid to a lender at closing to buy down the interest rate on a mortgage. One point costs 1% of the loan amount and typically lowers the interest rate by 0.25% (25 basis points).
Paying points is essentially pre-paying interest. The financial decision depends on whether you plan to hold the loan long enough for the monthly savings to exceed the upfront cost.
Let's define the math:
Points Cost $ = Loan Amount × (Points Cost %)/100
Monthly Savings = Monthly Payment_(Base) - Monthly Payment_(Discount)
Break-Even Time (Months) = (Points Cost $)/(Monthly Savings)
If you plan to sell the home or refinance the mortgage before the break-even month, paying points is a net financial loss. If you hold the mortgage past the break-even timeline, you save money over the life of the loan.