Mortgage Points

Mortgage points are interest paid at closing in exchange for a lower rate. One discount point costs 1% of the loan amount and typically buys the rate down by about 0.25 percentage points, though the exact trade varies by lender and market. On a $400,000 loan, one point is $4,000 and might move the rate from 6.5% to 6.25%.

Origination points are a different animal with the same name: fees the lender charges for making the loan, which buy no rate reduction at all. The loan estimate separates them, and the distinction matters because one is a purchase and the other is a cost. Points are tax-deductible as prepaid interest on a primary residence for borrowers who itemize, which softens the cost but not the break-even arithmetic.

The arithmetic is a break-even. One point on a $400,000 loan costs $4,000 and moves the rate from 6.5% to 6.25%, dropping the payment from roughly $2,528 to $2,463: a $65 monthly saving. The break-even is $4,000 divided by $65, about 62 months, or five years and two months. Sell or refinance before that and the point was a loss; hold past it and the point compounds into savings for the remaining life of the loan.

The rate reduction per point is not fixed. Lenders price the trade daily, and it varies with the loan size, the borrower's credit tier, and the rate environment: a point might buy 0.2% or 0.3% depending on the day. The loan estimate states the exact trade for your loan, which makes the break-even computable before signing rather than after.

The tax softens the cost without moving the break-even much. Points on a primary residence are deductible as prepaid interest in the year paid for itemizers, so a borrower in the 24% bracket recovers $960 of a $4,000 point. The after-tax cost is $3,040, the break-even shortens, and the hold period is still the decision that decides it.

Points are the rare mortgage feature with a clean answer: the break-even date. Everything else in a mortgage quote is negotiable noise; the point trade is arithmetic, and the hold period decides it. Borrowers who hold for 30 years should usually buy points, borrowers who move every five years should usually not, and both answers come from the same division.

I watched a colleague named Brent (yes, that Brent) pay two points, $8,000, on a loan he refinanced 34 months later. The break-even was 62 months, the sale came 28 months short, and the $8,000 bought rate he never used. The loan estimate had the trade printed in it, which is the part nobody reads at the closing table.

The highest-leverage thing most Americans can do is compute the break-even on the loan estimate before paying any point, and match the decision to the honest hold period. Run the trade with the mortgage amortization calculator and the refinance timing in the refinance calculator, and read the schedule the rate feeds in the mortgage amortization entry.