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Mortgage points: what you are buying
Points are prepaid interest with a payoff date. Whether they are a good deal depends almost entirely on how long you keep the loan.
Compare payments in the mortgage calculatorOne point is 1% of the loan
Points are paid at closing in exchange for a lower interest rate.
The Consumer Financial Protection Bureau defines one point as one percent of the loan amount: on a $100,000 loan, one point is $1,000. Points do not have to be round numbers — 0.5 points is $500, and 0.125 points is $125. They appear on the Loan Estimate and Closing Disclosure on page 2, Section A, and by law points listed there must be connected to a discounted interest rate.
How much a point lowers the rate is not fixed
It depends on the lender, the loan, and the market.
The CFPB is explicit that the rate reduction per point varies: sometimes a point buys a relatively large reduction, sometimes a small one. Ask each lender exactly what rate you get with zero, one, and two points, for the same kind of loan. The CFPB also notes that some lenders use the word points for any upfront fee calculated as a percentage of the loan, whether or not it lowers the rate — so ask what each one buys.
Work out the break-even month
Divide the cost of the points by the monthly saving.
The CFPB describes the break-even period as roughly the cost of the points divided by the monthly saving. Take an illustrative $300,000, 30-year loan. At 6.75% the principal-and-interest payment is about $1,945.79; at 6.50% it is about $1,896.20, a saving of $49.59 a month. If one point — $3,000 — buys that quarter-point reduction, the break-even is $3,000 ÷ $49.59, about 60 months, or five years.
| You keep the loan | Result of paying the point |
|---|---|
| Less than about 5 years | You lose money |
| About 5 years | You roughly break even |
| Longer | You come out ahead |
Lender credits are points in reverse
A higher rate in exchange for lower closing costs.
The CFPB explains that lender credits work the same way backward: you accept a higher interest rate and the lender gives you money toward closing costs, shown as a negative number in Section J. You pay less up front and more over time — which can suit someone short on cash or likely to move or refinance soon.
Deciding
The CFPB suggests comparing options over three time horizons.
If you do not know how long you will stay in the home, and you have enough cash for closing and savings, the CFPB suggests you may not want to pay points or take credits at all. Otherwise, ask a loan officer to show options with and without points or credits, with total costs over the shortest, longest, and most likely time you expect to keep the loan. The CFPB notes that points suit borrowers who plan to keep the loan a long time and have cash on hand, and are less useful for those who expect to refinance or move soon.
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QUESTIONS THIS ANSWERS
Questions this answers
- Are mortgage points worth paying?
- How long does it take to break even on points?