Mortgage points, also called discount points, are fees you pay upfront to lower your mortgage interest rate. One point equals one percent of the loan amount, so on a $300,000 loan, one point costs $3,000. In exchange, the lender reduces your rate, usually by about a quarter of a percentage point per point, though the exact tradeoff varies.
The key question is the breakeven point: how long until the monthly savings outweigh the upfront cost. Divide the cost of the points by your monthly savings. If one point costs $3,000 and saves you $60 a month, breakeven is 50 months. Stay past that and you come out ahead; sell or refinance before it and you lose money.
Points make the most sense when you plan to keep the loan a long time and have cash to spare at closing. They make less sense if you might move or refinance in a few years, or if paying points would drain your emergency fund. Also distinguish discount points from origination points, which are lender fees that do not lower your rate, and from lender credits, which work in reverse: the lender covers closing costs in exchange for a higher rate.
Common mistakes include buying points without doing the breakeven math, assuming points are always a good deal, and forgetting to compare the annual percentage rate, which bakes points and fees into one comparable number. Always compare loan offers by APR and total closing costs, not just the note rate.
This is general information, not financial advice. Loan terms vary by lender and market conditions.
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