Are mortgage discount points worth the cost?
With discount points, you're essentially paying cash today in exchange for future savings. The points reduce your interest rate, which reduces the amount of interest you'll pay over the life of the loan. Using points also reduces your monthly mortgage payment.
It makes sense to pay for discount points if you expect to own your house long enough to reach the break-even point — that is, the point in time when the total amount of money you've saved through the reduced interest rate equals the amount you paid upfront for the discount points. This date will vary depending on how many points you buy and the amount your interest is reduced, so be sure to ask your lender when your break-even point would be.
It doesn't make sense to purchase discount points if you need that cash for the down payment or moving costs, or if you only plan to live in the home for a few years and will never reach the break-even point.
How mortgage discount points work
To see how points can work in your favor, consider this example:
- Let's say you have a $200,000 mortgage at an interest rate of 4%.
- Your monthly mortgage payment would be approximately $955 every month (principal and interest — not counting escrow costs).
- But if you buy one mortgage discount point for $2,000 upfront, your interest rate would drop to 3.75%, which lowers your payment by about $29 per month.
- To calculate the break-even point, divide the amount you paid for the discount points (in this case, $2,000) by the amount of money you save per month (in this example, $29).
- In this particular example, you'd reach the break-even point if you own the home for at least five years and nine months, or 69 months ($2,000 ÷ $29). From that point forward, you'd save money every month.
- By the end of a 30-year loan, the total savings (after the break-even point) would add up to more than $8,400.
This is just one example. Your lender can show you exactly how mortgage discount points will impact your loan.