What are points on a mortgage? Money paid at closing to lower the interest rate: one point is 1% of the loan.
A discount point costs 1% of the loan amount and buys a permanently lower rate, commonly around a quarter of a percentage point though the exchange rate moves with the market. On a $400,000 loan, one point is $4,000 at closing.
The only question that matters is the break-even: the monthly saving divided into the cost. If a point saves $60 a month and costs $4,000, it pays for itself in about 66 months, so it is worth it if you keep the loan longer than that and a waste if you sell or refinance sooner. Most people move or refinance before the break-even on two or more points.
Points are different from origination fees, which are the lender's charge for making the loan and buy you nothing, and from a temporary buydown such as a 2-1, where a seller or builder subsidises the first years and the rate then rises to the note rate. Both show up in the same section of the Loan Estimate, so read which one you are being offered.
A worked example
On a $400,000 loan, one point costs $4,000 and lowers the rate by about a quarter percent, saving roughly $60 a month. The break-even is about 66 months. Sell or refinance before then and the $4,000 was spent for nothing.
Questions people ask
Are mortgage points worth it?
Only if you keep the loan past the break-even, which is the cost divided by the monthly saving. On a first house that most people leave inside seven years, one point is a close call and three is usually a bad one.
Are points tax deductible?
Points paid to buy down the rate on a purchase are generally deductible in the year paid if you itemize, unlike origination fees. This is general information, not tax advice.