How do mortgage points work?

Mortgage discount points are all about playing the long game. The longer you plan to own your home, the more points can help you save on interest over the life of your loan.

One discount point will cost you 1% of your home loan amount. So, for a $150,000 loan, a single mortgage point would cost $1,500. Each discount point you buy results in a fixed interest deduction. Typically, you can buy points in increments of 0.125%. But the amount by which your interest rate is reduced varies by lender.

Important, adjustable rate mortgage (ARM) Buyers have the option to purchase mortgage points for the life of their loan. However, since most ARMs adjust after 5 to 7 years, many ARM homebuyers skip this option.

The costs and savings with mortgage points

The goal of buying mortgage points is to save money on mortgage interest payments.

If you’re considering purchasing mortgage points upfront, it’s important to examine the numbers to see exactly how long it would take to recoup the cost of purchasing points. Typically this is referred to as breaking even.

You should make sure that you plan to own the house until it breaks even. Otherwise, it is not worth buying mortgage points.

Let’s see an example of how rebate points work on a $150,000 fixed-rate, 30-year mortgage. You can use one amortization calculator make your own comparisons based on different loan amounts and Interest charges.

As you can see from the chart above, the lower interest rate saves you $15,944.40 over 30 years, even though 1.75 points upfront costs $2,625. And even if you don’t stay in your house for 30 years, you’ll break even in about 5 years.

In this example, if you plan to live in your home longer than the breakeven period, mortgage rebate points could be a money-saving option.

It is important to note that the numbers in the example above are hypothetical. The interest rate on a specific number of mortgage points purchased varies by lender. In addition, these calculations do not include property taxes and insurance.

Determine your breakeven point

To calculate breakeven, divide the cost of the points by the savings on your monthly payment. This will give you the number of months it will take for the savings on the monthly payment to equal the upfront cost of purchasing points.

Compare your break even point with your home buying plans. If you intend to live in the house beyond break even, mortgage points could be an easy decision.