Here’s one of my favorite mortgage questions:

“What’s your rate?”

Okay.

At what cost?

Because mortgage rates don’t exist in a vacuum.

One lender might quote you 6.25%.

Another might quote you 6.50%.

That doesn’t automatically mean the first lender is cheaper.

Maybe they charged you $8,000 to get there.

Welcome to mortgage points.

Let’s make this simple.

What Are Mortgage Discount Points?

Discount points are money you pay upfront to get a lower mortgage interest rate.

You’re basically making a trade:

More money today.

For:

A lower payment over time.

How Much Does One Mortgage Point Cost?

One point equals:

1% of the loan amount.

Not the purchase price.

The loan amount.

So on a $500,000 mortgage:

1 point = $5,000.

Half a point:

$2,500.

A quarter point:

$1,250.

Pretty simple.

Does One Point Always Lower Your Rate by the Same Amount?

No.

This is where people get screwed up.

There is no universal rule that says:

“One point lowers your rate by exactly 0.25%.”

The rate reduction depends on the lender, loan program and mortgage market at that time.

So don’t just ask:

“How many points?”

Ask:

“How much does this cost me, and what rate does that actually buy?”

How Do You Know If Paying Points Is Worth It?

Math.

Let’s say paying points costs:

$5,000.

And the lower rate saves:

$125 per month.

$5,000 divided by $125 = 40 months.

That’s your simple break-even point.

About three years and four months.

Now ask yourself:

Am I likely to still have this mortgage 40 months from now?

If you’re selling next year?

Probably a shitty investment.

If you’re keeping the house for ten years?

Now we’ve got a completely different conversation.

What Happens If You Refinance Before Breaking Even?

This is why paying points isn’t automatically smart.

Maybe rates fall.

Maybe you refinance.

Maybe you sell.

Maybe you move.

Maybe life happens.

If you paid thousands upfront but refinance before you’ve recovered that cost through monthly savings, you may never receive the benefit you paid for.

That’s why the expected life of the mortgage matters.

Not just the advertised rate.

What Are Lender Credits?

Now flip the whole thing around.

Instead of paying more money for a lower rate, you can sometimes accept a higher interest rate in exchange for lender credits toward your closing costs.

Higher rate.

Less money upfront.

Again:

Neither option is automatically good or bad.

It depends on what you’re trying to accomplish.

Should You Always Choose the Lowest Rate?

Hell no.

This is one of the biggest mistakes borrowers make.

They compare:

6.25%

versus

6.50%

and immediately choose 6.25%.

But what if 6.25% costs $10,000 more?

Now we have something to talk about.

A mortgage should be compared based on:

Rate

Points

Lender fees

Monthly payment

Cash to close

And how long you realistically expect to keep the loan.

That’s a real comparison.

What If the Seller Pays the Points?

Depending on the loan program and transaction structure, a seller may be able to contribute toward discount points.

That can potentially allow the borrower to obtain the lower rate without personally bringing all that additional cash to closing.

This is especially relevant when negotiating in a market where sellers are willing to provide concessions.

And yes, this is one reason purchase price isn’t the only thing worth negotiating.

Points vs. Temporary Buydowns

They’re not the same thing.

Discount points are paid upfront to obtain a lower note rate according to the lender’s pricing.

A temporary buydown uses funds to temporarily reduce the borrower’s effective payment during the first portion of the loan.

If you want to understand that option, read:

Temporary Mortgage Buydowns Explained: What Is a 2-1 Buydown?

So Should You Buy Mortgage Points?

Maybe.

Here’s what I want to know:

How much do the points cost?

How much does the payment drop?

What’s the break-even period?

How long do you expect to keep the mortgage?

What else could you do with that cash?

Then we make a decision.

Not:

“6.125% sounds better than 6.375%.”

Of course it does.

The question is:

What did you pay to get it?

The Bottom Line

Mortgage points aren’t good.

Mortgage points aren’t bad.

They’re a financial tool.

Sometimes paying them makes perfect sense.

Sometimes you’re lighting thousands of dollars on fire just so you can brag about your interest rate.

Run the numbers.

Understand your break-even point.

Think about how long you’ll realistically keep the loan.

Then make the decision.

Rate matters.

Cost matters too.

And anybody showing you one without the other isn’t showing you the whole damn mortgage.