Mortgage Basics
What Are Mortgage Points?
Mortgage points — or discount points — are upfront fees paid to a lender at closing in exchange for a lower interest rate. One point equals 1% of the loan amount. Points are a form of prepaid interest that reduces monthly payments over the life of the loan.
Types of Points
Discount Points
Optional fees paid to buy down the interest rate. Each point (1% of loan amount) typically lowers the rate by 0.25%. Example: on a $400,000 loan, 1 point = $4,000 upfront to reduce the rate by ~0.25% and save ~$50/month.
Origination Points
Fees charged by the lender for processing and originating the loan. These compensate the lender — they do NOT buy down the interest rate. Both types are expressed as a percentage of the loan amount and paid at closing.
Lender Credits (Negative Points)
The inverse of discount points — the lender pays some or all of the buyer's closing costs in exchange for a higher interest rate. Reduces upfront costs but increases long-term payment. Good for buyers who plan to move within a few years.
Break-Even Calculation
Break-even = Upfront Cost ÷ Monthly Savings. Example: $4,000 points to save $50/month = 80 months (6.7 years) to break even. Only worth buying points if you'll own the home longer than the break-even period.
Real Estate Exam Key Points
1 point = 1% of the loan amount
Discount points lower the interest rate; origination points are lender fees
Points are paid at closing — they are prepaid interest
Break-even period = upfront cost ÷ monthly savings
Lender credits are negative points — lower upfront cost, higher rate
Tax deductibility: discount points may be deductible as mortgage interest (consult a tax advisor)
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