Mortgage Points, Explained Simply
An upfront fee that buys down your mortgage rate for the loan's life.
Mortgage points are an upfront fee you pay the lender at closing to buy yourself a lower interest rate for the life of the loan.
The idea is simple. You hand over some cash now, and in exchange the lender shaves your interest rate down. One point costs 1 percent of your loan amount and typically lowers your rate by about a quarter of a percent. On a $300,000 loan, one point runs $3,000 and might drop your rate from, say, 6.75 percent to 6.5 percent.
Whether that is a good deal comes down to one thing: how long you stay. Paying points only pays off if you keep the loan long enough for the monthly savings to add up past what you spent. That tipping point is called the break-even. If one point saves you $45 a month, your break-even is about $3,000 divided by $45, or roughly 67 months. Stay past that, you come out ahead. Sell or refinance before it, you lost money on the trade.
So the question to ask yourself is honest and simple. Are you planning to be in this house for the long haul, or is this a stepping-stone home you will leave in a few years? Long haul, points can be worth it. Short stay, keep your cash. There is also a possible tax angle on points in some cases, but that depends on your situation, so check with a tax professional before counting on it.
Bottom line: Points are prepaid interest that only pay off if you stay past the break-even, so do the math on your timeline before you write that check.
This is general education, not personal financial advice. Your own situation may call for a different move.
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