GLOSSARY — REAL ESTATE TERMS
Mortgage Points
Mortgage points, also called discount points, are an upfront fee paid at closing to reduce a loan's interest rate -- each point typically costs 1% of the loan amount and lowers the rate by a fraction of a percentage point.
How points work
One point costs 1% of the loan amount -- $8,000 on a $800,000 loan, for example -- paid upfront at closing in exchange for a lower interest rate over the life of the loan. The exact rate reduction per point varies by lender and market conditions.
Calculating the breakeven
Buying points only pays off if the borrower keeps the loan long enough for the monthly savings to exceed the upfront cost -- commonly a breakeven period of several years. Buyers who expect to sell or refinance sooner than that breakeven point generally come out ahead skipping points altogether.
WHAT TO ASK BEFORE BUYING MORTGAGE POINTS
- Get the exact breakeven timeline in months from your lender
- Be realistic about how long you'll actually keep this loan
- Compare the upfront cost against using that cash for a larger down payment instead
- Ask whether the points would be tax deductible in your situation
Are mortgage points tax deductible?
In many cases points can be deductible, subject to IRS rules and limits -- a tax professional can confirm how this applies to your specific situation.
Is buying points always worth it?
No -- it depends entirely on how long you plan to keep the loan. Ask your lender for the specific breakeven timeline before deciding.
What's the difference between discount points and origination points?
Discount points buy down your interest rate. Origination points are a separate lender fee for processing the loan and don't affect your rate at all.