What Is Mortgage Points?
Upfront fees paid to the lender to lower your interest rate, where one point equals 1% of the loan.
Definition
Discount points are an upfront payment to lower your mortgage rate. One point costs 1% of the loan amount and typically reduces your rate by about 0.25%. Points only make sense if you keep the loan long enough to recoup the cost through monthly savings. The break-even period is usually 4-7 years. Origination points are different: they pay the lender for processing, not for a rate reduction.
Formula
Break-even months = Cost of points / Monthly savings from lower rate
Example
Pay 1 point ($3,000 on a $300,000 loan) to drop the rate from 6.5% to 6.25%. Saves $50/month. Break-even: 60 months (5 years).
Use It
Try the Loan CalculatorRelated Terms
Interest RateThe percentage a lender charges to borrow money, or that a bank pays on a deposit, per year.Closing CostsFees paid at the closing of a real estate transaction, typically 2-5% of the loan amount.APR (Annual Percentage Rate)The yearly cost of a loan including interest plus most fees, expressed as a percentage.