When shopping for a home, you’ll come across various terms that impact your finances as a buyer. One such term is "discount points." If you’re wondering what they are and how they work, you’re in the right place. In this blog, we’ll explain discount points, their benefits, and when they make sense for homebuyers.

What Are Discount Points?
Discount points, often referred to as "mortgage points," are an optional fee you can pay upfront to lower your mortgage interest rate. Essentially, you’re paying money now in exchange for saving money over the life of your loan.
Here’s how it works: one discount point typically costs 1% of your total loan amount. For example, on a $250,000 loan, one point would cost $2,500. However, the exact cost and the amount by which it lowers your interest rate can vary depending on daily market rates and lender pricing. This means that the cost of points and the savings they provide are not fixed and can change from day to day based on broader economic conditions.---
How Do Discount Points Work?
Let’s look at an example to understand how discount points can impact your mortgage payments:
Imagine you’re taking out a 30-year fixed mortgage of $300,000 at an interest rate of 6% with no discount points. Your monthly principal and interest payment would be about $1,799.
Now, let’s say you buy 2 discount points at $6,000. Each point lowers your interest rate by 0.25%, so your new rate would be 5.5%. Your new monthly payment would drop to approximately $1,703. That’s a $96 savings every month, or $34,560 over 30 years. Over time, the upfront cost of the discount points is offset by the savings in interest.
What Is the Break-Even Point?
To decide if buying discount points is a good move, calculate your break-even point. This is the amount of time it takes for the savings from the lower monthly payments to cover the upfront cost of the points.
Using the example above:
Cost of discount points: $6,000
Monthly savings: $96
Break-even point: $6,000 ÷ $96 = 62.5 months (about 5 years and 2 months)
If you plan to stay in your home for longer than 5 years and 2 months, buying discount points can be a smart financial choice.
When Should You Consider Buying Discount Points?
Discount points are not a one-size-fits-all solution. Here are some factors to consider:
How Long You’ll Stay in the Home: If you plan to stay in your home for many years, the long-term savings from a lower interest rate can outweigh the initial cost of the points. But if you might sell or refinance soon, you may not save enough to justify the expense.
Your Financial Goals: Do you prefer smaller monthly payments or keeping cash on hand for other expenses? Discount points are an upfront cost, so make sure paying for them fits within your budget.
Market Interest Rates: In times of low mortgage rates, buying points may yield minimal additional savings. However, in a higher-rate environment, reducing your interest rate could make a bigger impact.
Pros and Cons of Discount Points
Pros:
Lower monthly payments
Reduced total interest paid over the life of the loan
Potential tax deduction (consult a tax advisor)
Cons:
Higher upfront costs
Savings depend on how long you keep the loan
May not be beneficial in a short-term homeownership scenario
Key Takeaways
Discount points offer a way to lower your mortgage interest rate by paying a fee upfront.
They’re best suited for buyers who plan to stay in their homes long-term and can afford the initial cost.
Always calculate your break-even point to determine if discount points align with your goals.
Need Help Deciding?
Every homebuyer’s situation is unique, and the right choice depends on your budget, plans, and preferences. If you’d like personalized advice on whether buying discount points is right for you, feel free to reach out. I’m here to help you make the best decision for your financial future!
Contact: Casandra Alvarez | NMLS# 1100945 | Mortgage Loan Officer | 219-707-0316 |
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