Mortgage discount points: paying more now for a lower rate

A discount point is an upfront charge tied to a lower interest rate. One point is generally 1% of the loan amount: on a $300,000 loan, one point would be $3,000. The rate reduction for that fee is not fixed; it varies by lender, loan, and pricing at the time.

Compare the same loan with and without points

Ask the lender for written Loan Estimates with the same loan amount, type, term, and lock period, showing zero points and the points option. Compare the rate, monthly principal and interest, points, other lender fees, total monthly payment, and cash to close. Confirm that the fee labeled points is actually buying a lower rate; “points” can also be used casually for other percentage-based charges.

Estimate how long it takes to break even

A simple starting calculation is the extra upfront cost divided by the monthly payment savings. If points cost $2,400 and reduce the payment by $40 a month, the simple break-even is 60 months. This is only a screening calculation: compare the full loan costs and balance over the time you expect to keep the mortgage, and account for whether you may move, sell, or refinance before that point.

Paying points may be a poor fit if the upfront money would leave too little for reserves or if you expect to leave the loan before savings catch up. Ask the lender to model a few time periods you consider realistic, rather than relying on a lifetime-interest figure you may never reach.

The CFPB explains how lender credits and discount points work and how to compare Loan Estimates.