{"id":41592,"date":"2020-05-28T08:01:30","date_gmt":"2020-05-28T16:01:30","guid":{"rendered":"https:\/\/www.credible.com\/blog\/?p=41592"},"modified":"2023-02-08T09:32:51","modified_gmt":"2023-02-08T17:32:51","slug":"mortgage-points-what-are-they-and-are-they-worth-it","status":"publish","type":"post","link":"https:\/\/www.credible.com\/blog\/mortgages\/mortgage-points\/","title":{"rendered":"Mortgage Points: What Are They and Are They Worth It?"},"content":{"rendered":"<p>Mortgage points, also called discount points, are an option for homebuyers looking for the lowest interest rate on their loan. They offer a trade-off: Pay an extra fee at closing and get a lower rate over the course of your loan term. <\/p>\n<p><b>Here\u2019s what you need to know about mortgage points:<\/b><\/p>\n<ul>\n<li><a href=\"#mortgage-points\">What are mortgage points?<\/a><\/li>\n<li><a href=\"#how-do-mortgage-points-work\">How do mortgage points work?<\/a><\/li>\n<li><a href=\"#how-much-are-mortgage-points\">How much are mortgage points?<\/a><\/li>\n<li><a href=\"#how-to-calculate\">How to calculate mortgage points<\/a><\/li>\n<li><a href=\"#how-do-mortgage-points-save-money\">How do mortgage points save you money?<\/a><\/li>\n<li><a href=\"#mortgage-discounts-are-tax-deductible\">Mortgage points are tax-deductible<\/a><\/li>\n<li><a href=\"#origination-points\">Origination points<\/a><\/li>\n<li><a href=\"#mortgage-points-vs-lender-credits\">What is the difference between mortgage points and lender credits?<\/a><\/li>\n<li><a href=\"#are-mortgage-discount-points-worth-it\">Are mortgage discount points worth it?<\/a><\/li>\n<\/ul>\n<p><a name=\"mortgage-points\"><\/a><\/p>\n<h2>What are mortgage points?<\/h2>\n<p>Mortgage points, or discount points, are fees you can pay your lender to reduce the interest rate on your <a href=\"https:\/\/www.credible.com\/mortgage\">home loan<\/a>. This is sometimes known as \u201cbuying down the rate.\u201d <\/p>\n<p>Mortgage points are always optional, and if you choose to buy them, the lender will add the points to your closing costs. That means buying discount points increases your upfront costs, but it allows you to save more money over the long run on your monthly payments.<br \/>\n<a name=\"how-do-mortgage-points-work\"><\/a><\/p>\n<h2>How do mortgage points work?<\/h2>\n<p>Mortgage discount points are relatively simple. Here\u2019s how they work: <\/p>\n<ol>\n<li>You agree to pay the lender for a \u201cpoint.\u201d Each mortgage point usually costs 1% of the total loan amount. <\/li>\n<li>Your lender then agrees to lower your rate by a certain percentage \u2014 typically 0.25%, but it varies by lender.<\/li>\n<\/ol>\n<p><b>For example: <\/b>On a 30-year home loan worth $300,000, one mortgage point will likely cost you $3,000. Each point you buy reduces your interest rate by a specific amount \u2014 typically 0.25%. So, after buying one point, a 3.50% interest rate would fall to 3.25%. That might not sound like much, but you would save nearly $12,000 over the life of the loan.<\/p>\n<p><b>Here\u2019s how two home loans would look with and without points:<\/b><\/p>\n\n<table id=\"tablepress-304\" class=\"tablepress tablepress-id-304 table table-border-top table-rounded table-no-img-margin table-capitalized-column-titles tbody-has-connected-cells\">\n<thead>\n<tr class=\"row-1\">\n\t<td class=\"column-1\"><\/td><th class=\"column-2\"><strong>Without points<\/strong><\/th><th class=\"column-3\"><strong>With points<\/strong><\/th>\n<\/tr>\n<\/thead>\n<tbody class=\"row-striping row-hover\">\n<tr class=\"row-2\">\n\t<td class=\"column-1\"><strong>Loan amount<\/strong><\/td><td class=\"column-2\">$300,000<\/td><td class=\"column-3\">$300,000<\/td>\n<\/tr>\n<tr class=\"row-3\">\n\t<td class=\"column-1\"><strong>Down payment<\/strong><\/td><td class=\"column-2\">$60,000<\/td><td class=\"column-3\">$60,000<\/td>\n<\/tr>\n<tr class=\"row-4\">\n\t<td class=\"column-1\"><strong>Mortgage rate<\/strong><\/td><td class=\"column-2\">3.50%<\/td><td class=\"column-3\">3.25%<\/td>\n<\/tr>\n<tr class=\"row-5\">\n\t<td class=\"column-1\"><strong>Monthly payment<\/strong><\/td><td class=\"column-2\">$1,078<\/td><td class=\"column-3\">$1,045<\/td>\n<\/tr>\n<tr class=\"row-6\">\n\t<td class=\"column-1\"><strong>Total interest paid over loan term<\/strong><\/td><td class=\"column-2\">$147,975<\/td><td class=\"column-3\">$136,018<\/td>\n<\/tr>\n<tr class=\"row-7\">\n\t<td class=\"column-1\"><strong>Total payments over loan term<\/strong><\/td><td class=\"column-2\">$387,975<\/td><td class=\"column-3\">$376,018<\/td>\n<\/tr>\n<tr class=\"row-8\">\n\t<td colspan=\"3\" class=\"column-1\"><small><strong>Note:<\/strong> All numbers here are for demonstrative purposes only and do not represent an advertisement for available terms.<\/small><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n\n<p><a name=how-much-are-mortgage-points><\/a><\/p>\n<h2>How much are mortgage points?<\/h2>\n<p>Mortgage points are calculated in relation to how much you\u2019re borrowing. As mentioned previously, one discount point costs 1% of the loan amount. So, if you have a $300,000 loan, one point will cost you $3,000. But if you have good credit and a large down payment, you might be able to negotiate a lower price for each discount point.<\/p>\n<p><a name=\"how-to-calculate\"><\/a><\/p>\n<h2>How to calculate mortgage points <\/h2>\n<p>To calculate discount points on a mortgage, we\u2019ll use the previous example of a $300,000 home loan. <\/p>\n<h3>1. Calculate the cost of one point<\/h3>\n<p>One point costs 1% of the loan amount, so multiply $300,000 by 1%:<\/p>\n<p><b>$300,000 x 0.01 = $3,000<\/b><\/p>\n<p>In this example, buying one discount point costs $3,000 and saves you $33 a month. <\/p>\n<h3>2. Calculate your breakeven point<\/h3>\n<p>You\u2019ll also want to know how long it takes to recover the upfront cost based on how much you save. To find out when you\u2019ll break even, divide the cost of the discount points by your monthly savings:<\/p>\n<p><b>$3,000 \/ $33 = about 91 months, or 7.5 years <\/b><\/p>\n<p>In this example, you would need to stay in your home for at least 7.5 years to cover the cost of the points you buy and start saving money on your mortgage. <\/p>\n<p>It\u2019s hard to predict exactly how long you\u2019ll stay in a home before you buy it, but try to come up with a realistic estimate when comparing mortgage quotes. This can help you make the right decision about whether to buy points.<br \/>\n<a name=\"how-do-mortgage-points-save-money\"><\/a><\/p>\n<h2>How do mortgage points save you money?<\/h2>\n<p>To evaluate if mortgage points are smart for your home purchase, you\u2019ll need an idea of how long you\u2019ll stay in the home. In order for points to be worth their price, you\u2019ll have to reach the breakeven point \u2014 or the point at which you save more than you spent.<\/p>\n<p>In the previous example, a point would cost about $3,000. At a savings of $33 per month, it would take around 91 months (7.5 years) to break even on that $3,000. If you think you\u2019ll move before that point, then it\u2019s probably not a smart move to buy the points.<\/p>\n<p><b><i>Find Out: <\/i><\/b><a href=\"https:\/\/www.credible.com\/blog\/mortgages\/how-to-buy-a-house\/\"><b><i>How to Buy a House: Step-by-Step Guide<\/i><\/b><\/a><b><i> <\/i><\/b><\/p>\n<p><a name=\"mortgage-discounts-are-tax-deductible\"><\/a><\/p>\n<h2>Mortgage points are tax-deductible<\/h2>\n<p>If you do end up purchasing discount points, you can actually deduct their costs from your annual tax returns \u2014 as long as you itemize deductions. You can deduct them for either the year you purchase the home or deduct them incrementally across your loan term, depending on various factors (including the loan purpose).<\/p>\n<div class=\"basic-box\" style=\"border: 1px solid #E2E4E6;\"><div class=\"basic-box__inside\">There are a few caveats, though, if you want to deduct your points in the year you took out the loan, including:<\/p>\n<ul>\n<li>The home you took out the loan to purchase or build must be your primary residence.<\/li>\n<li>The points weren\u2019t more than the general average for your area.<\/li>\n<li>The points weren\u2019t used for anything like an appraisal fee, inspection, or another charge.<\/li>\n<li>You didn\u2019t borrow funds from your lender or broker to pay the points.<\/div><\/div><\/li>\n<\/ul>\n<p>Your closing settlement statement (or \u201cClosing Disclosure\u201d) will also need to clearly identify the points (and their cost). Here is the <a href=\"https:\/\/www.irs.gov\/taxtopics\/tc504\">full set of requirements from the IRS<\/a>, but you should consult a tax professional if you\u2019re thinking of deducting your points.<\/p>\n<p><b><i>Learn More: <\/i><\/b><a href=\"https:\/\/www.credible.com\/blog\/mortgages\/cost-to-buy-house\/\"><b><i>How Much Does It Cost to Buy a Home?<\/i><\/b><\/a><b><i> <\/i><\/b><br \/>\n<a name=\"origination-points\"><\/p>\n<h2>Origination points<\/h2>\n<p>Origination points aren\u2019t to be confused with discount points. Unlike discount points, origination points won\u2019t reduce your interest rate \u2014 they\u2019re a fee you pay the lender for originating, reviewing, and processing the loan.<\/p>\n<p>These points typically cost 1% of the total mortgage amount. For instance, if your lender charges 1.5 origination points on a $300,000 home loan, you\u2019ll need to pay $4,500 at closing. <\/p>\n<p><b>Tip: <\/b>You can find this fee on page 2 of your <a href=\"https:\/\/www.credible.com\/blog\/mortgages\/loan-estimate-closing-disclosure\/\">loan estimate<\/a>. Origination points aren\u2019t optional, like discount points are, but you might be able to negotiate with the lender to waive or lower them. Having strong credit and a large down payment can help.<\/p>\n<p><a name=\"mortgage-points-vs-lender-credits\"><\/a><\/p>\n<h2>What is the difference between mortgage points and lender credits?<\/h2>\n<p>When looking at your loan estimate, you might see two different kinds of points: mortgage points (or discount points) and lender credits.<\/p>\n<p>With mortgage points, you\u2019re paying to lower your interest rate. With lender credits, you\u2019re agreeing to pay a higher interest rate in exchange for lowering your costs at closing.<\/p>\n<div class=\"basic-box\" style=\"border: 1px solid #E2E4E6;\"><div class=\"basic-box__inside\">Generally, here\u2019s when you should consider each:<\/p>\n<ul>\n<li><b>Mortgage points<\/b> are your best bet if you know you\u2019ll be in the home a while, as it will equate to the most in long-term savings.<\/li>\n<li><b>Lender credits<\/b> can be a good option if you\u2019re just looking to get in the home with the lowest upfront costs. It\u2019s also better for short-term buyers (a higher interest rate isn\u2019t ideal if you\u2019ll be in the home for decades).<\/div><\/div><\/li>\n<\/ul>\n<p><b>Here\u2019s a quick look at mortgage points vs. lender points:<\/b><\/p>\n\n<table id=\"tablepress-305\" class=\"tablepress tablepress-id-305 table table-border-top table-rounded table-no-img-margin table-capitalized-column-titles\">\n<thead>\n<tr class=\"row-1\">\n\t<td class=\"column-1\"><\/td><th class=\"column-2\"><strong>Mortgage points<\/strong><\/th><th class=\"column-3\"><strong>Lender credits<\/strong><\/th>\n<\/tr>\n<\/thead>\n<tbody class=\"row-striping row-hover\">\n<tr class=\"row-2\">\n\t<td class=\"column-1\"><strong>Purpose<\/strong><\/td><td class=\"column-2\">Lower your interest rate<\/td><td class=\"column-3\">Lower your costs at closing<\/td>\n<\/tr>\n<tr class=\"row-3\">\n\t<td class=\"column-1\"><strong>Good for<\/strong><\/td><td class=\"column-2\"><ul><li>Saving on long-term costs<\/li><li>Achieving a lower monthly payment<\/li><li>Buyers who plan to stay in the home for the long haul<\/li><\/ul><\/td><td class=\"column-3\"><ul><li>Buyers with less in savings<\/li><li>Buyers planning to be in the home a short duration<\/li><\/ul><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n\n<p><a name=\"are-mortgage-discount-points-worth-it\"><\/a><\/p>\n<h2>Are mortgage discount points worth it?<\/h2>\n<p>Mortgage points can only be purchased at closing, so be ready to make a decision early in the process \u2014 both when buying a home or applying for a <a href=\"https:\/\/www.credible.com\/mortgage-refinance\">mortgage refinance<\/a>.<\/p>\n<p>Remember that points are negotiable, too, so if you\u2019re not happy with the cost or how much a point can lower your rate, it might be worth asking your lender for a better deal.<\/p>\n<p>Shopping around can also help give you a better shot at a low rate. Just keep in mind that many advertised rates already have points factored in, so pay close attention to any loan estimates you receive. Points will be noted on Page 2 of the document.<\/p>\n<p>If you\u2019re ready to get started on your mortgage rate-shopping journey, or to see what <a href=\"https:\/\/www.credible.com\/blog\/mortgages\/types-of-mortgage-loans\/\">types of mortgage loans<\/a>, you qualify for, Credible Operations, Inc. can help. We\u2019ll help you compare rates from multiple lenders in just minutes.<\/p>\n<p><div class=\"basic-box\" style=\"border: 1px solid #E2E4E6;\"><div class=\"basic-box__inside\"><\/p>\n<h3><span style=\"font-size: x-large;\"><strong>Credible makes finding a mortgage easy<\/strong><\/span><\/h3>\n<h6 class=\"accent--isGrayLight\">Compare prequalified mortgage rates from top lenders in just 3 minutes.<\/h6>\n<ul class=\"list--iconArrow accent--isGreen list--iconCheckmarkSolidCircle\">\n<li>Personalized rates, not generic<\/li>\n<li>One simple, safe TLS-encrypted form<\/li>\n<li>No spam calls from lenders<\/li>\n<li>Checking rates is free, with no commitment<\/li>\n<\/ul>\n<p style=\"text-align: center;\"><a class=\"btn btn-warning\" href=\"https:\/\/www.credible.com\/mortgage\/form\/property-stage?utm_source=wp-credible&amp;utm_medium=mp-box-cta&amp;utm_campaign=seo\" target=\"_blank\" rel=\"noopener\">Find My Rate<\/a><br \/>\n<!-- TrustBox widget - Micro Combo --><\/p>\n<div class=\"trustpilot-widget\" data-locale=\"en-US\" data-template-id=\"5419b6ffb0d04a076446a9af\" data-businessunit-id=\"5536ec090000ff00057eebe7\" data-style-height=\"20px\" data-style-width=\"100%\" data-theme=\"light\"><a href=\"https:\/\/www.trustpilot.com\/review\/www.credible.com\" target=\"_blank\" rel=\"noopener noreferrer\">Trustpilot<\/a><\/div>\n<p><!-- End TrustBox widget --><\/p>\n<p><\/div><\/div><\/p>\n\n<p><a href=\"https:\/\/www.credible.com\/blog\/author\/kim-porter\/\"><i>Kim Porter<\/i><\/a><i> contributed to the reporting for this article.<\/i><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Mortgage points, also called discount points, are an option for homebuyers looking for the lowest interest rate on their loan. They offer a trade-off: Pay an extra fee at closing and get a lower rate&hellip; <a class=\"more \" href=\"https:\/\/www.credible.com\/blog\/mortgages\/mortgage-points\/\">Continue reading<\/a><\/p>\n","protected":false},"author":101,"featured_media":41597,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"om_disable_all_campaigns":false,"inline_featured_image":false,"footnotes":""},"categories":[1463],"tags":[1534,1524,1528],"class_list":["post-41592","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mortgages","tag-home-loans-101","tag-mortgage-purchase","tag-mortgage-rates-sidebar-no-table","mortgage-points-what-are-they-and-are-they-worth-it","post_tag-home-loans-101","post_tag-mortgage-purchase","post_tag-mortgage-rates-sidebar-no-table"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.6 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Mortgage Points: What Are They and Are They Worth It?<\/title>\n<meta name=\"description\" content=\"If you\u2019re buying a home, it\u2019s important to understand how points could affect your costs. Here\u2019s when you should and shouldn\u2019t buy points.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.credible.com\/blog\/mortgages\/mortgage-points\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Mortgage Points: What Are They and Are They Worth It?\" \/>\n<meta property=\"og:description\" content=\"If you\u2019re buying a home, it\u2019s important to understand how points could affect your costs. 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