Understanding Mortgage "Points": Should You Buy Them When Purchasing a Home?

dkeltner1
2 hours ago
4 min read

When you’re buying a home, you’ll hear a lot of new terms—earnest money, escrow, title insurance, and one that comes up often: mortgage points (also called discount points).Many buyers wonder: What are points? Should I buy them? Do they actually save me money?Below is a clear breakdown of how points work, when they make sense, when they don’t, and how seller credits can help pay for them.

What Are Mortgage Points?

Mortgage points are an optional fee a buyer can pay at closing to reduce their interest rate.Think of it as pre-paying interest up-front in exchange for lower interest over the life of the loan.

How it works:

1 point = 1% of your loan amount.(On a $500,000 loan, 1 point costs $5,000.)
Each point typically lowers your interest rate by about 0.25%, but the actual impact varies by lender, loan type, and market conditions.

Purpose:Buying points is essentially a trade: pay more now, save more later.

Why Would Someone Buy Points? (The Benefits)

1. Lower Monthly Payments

A reduced interest rate means your monthly mortgage payment shrinks—sometimes by hundreds per month on higher loan amounts.

2. Long-Term Interest Savings

Over 30 years, even a small rate reduction can save tens of thousands in interest.

3. Tax Advantages (For Some Borrowers)

In many cases, the IRS allows mortgage points to be deducted as mortgage interest.*(Buyers should always consult a tax professional.)

4. Locking in Affordability

If you plan to stay in the home long-term, buying points helps you secure a lower cost of borrowing for the life of the loan.

When Buying Points Makes the Most Sense

1. You Plan to Keep the Home for a While

The biggest factor is your break-even period—how long it takes for the monthly savings to outweigh the upfront cost.

Example:

Cost of points = $6,000
Monthly savings = $100
Break-even = 60 months (5 years)

If you’ll be in the home longer than the break-even point, buying points often makes great financial sense.

2. You Want Long-Term Stability

If your goal is to secure the lowest possible rate in a rising interest rate environment, buying points can be a smart hedge.

3. You Have Extra Cash at Closing (or Seller Credits)

If you have room in your budget—or if someone else is helping cover costs (more on that below)—discount points can be a powerful way to invest in lower payments.

When Buying Points Does NOT Make Sense

1. You’re Not Sure How Long You’ll Keep the Home

If you expect to sell or refinance within a few years, you may not reach the break-even point.

2. You’re Tight on Cash

If paying points reduces your ability to build an emergency fund or make home repairs, your cash may be better used elsewhere.

3. You’re Planning a Refinance Soon

During falling-rate markets, many borrowers refinance within 1–2 years.If that’s likely for you, buying points now may be wasted money.

4. You Need the Lowest Possible Down Payment

If your priority is to lower the down payment or avoid high closing costs, skipping points keeps more cash in your pocket.

Using Seller Credits to Buy Points

One of the most powerful ways to reduce your payment without spending your own cash is to use seller concessions (seller credits) to buy down your rate.

How it works:

You negotiate a credit from the seller as part of the offer.
Those credits can be applied to closing costs, including discount points.
You get the benefit of a lower interest rate without writing a check for the cost.

Why this is powerful:

Seller credits are finite—you can’t use them toward a down payment.
Applying them to a rate buy-down often gives buyers the highest return on those dollars, especially compared to simply reducing closing costs.

This strategy is especially common in slower markets or on new construction homes, where sellers are more willing to negotiate.

How to Decide: Should You Buy Points?

Ask yourself these questions:

How long do I expect to keep this mortgage?(If the answer is 5–7+ years, points become attractive.)
Do I have enough cash available—or seller credits—to cover the cost?
What is my break-even point?(Your lender can calculate this in seconds.)
What else could I do with the money?(Emergency fund? Home repairs? Paying off higher-interest debt?)

Your mortgage lender can show you scenarios with and without points so you can compare real numbers side by side.

Bottom Line

Buying mortgage points is a powerful tool to lower your interest rate and monthly payment, but it’s not always the right move for every buyer.The key is understanding:

What points cost today
How much they reduce your rate
How long it takes to break even
Whether you can use seller credits to cover the cost

When used strategically, points can help you lock in long-term savings and make your home more affordable for years to come.