Somewhere in every mortgage quote sits a line about "points," and it's one of the few pieces of the deal you get to dial up or down. Understanding the dial is worth real money in both directions.
What a point is
A discount point costs 1% of the loan amount, paid at closing, and buys a permanently lower interest rate — commonly in the neighborhood of a quarter of a percentage point off, though the exact trade varies by lender and market. Buying points is often called "buying down the rate."
(Don't confuse discount points with an origination point, which is just a fee for making the loan — it buys you nothing.)
Lenders will also run the dial the other way: negative points, or lender credits, where you accept a higher rate in exchange for cash toward your closing costs.
The only calculation that matters: break-even
Points are prepaid interest, so the question is when the prepayment pays for itself.
- Take the cost of the points.
- Take the monthly payment savings from the lower rate.
- Divide. That's your break-even in months.
Stay in the loan longer than the break-even and the points were a good buy that keeps paying every month after. Sell or refinance before it, and you paid for a discount you never collected.
What tips the decision
Buying points makes more sense when you're confident you'll hold the loan well past break-even, you have spare cash at closing beyond your down payment and reserves, and rates are such that a refinance anytime soon looks unlikely.
Skipping points (or taking credits) makes more sense when cash at closing is tight, your time horizon is uncertain, or there's a decent chance you'll refinance — a refi resets the loan and vaporizes whatever you prepaid.
A subtle trap: spending reserve cash on points to shave the payment, then arriving at homeownership with no cushion. A slightly higher rate with money in the bank beats a slightly lower rate and an empty account — repairs don't wait for your break-even date.
How to comparison-shop when points are involved
Quotes with different point structures can't be compared on rate alone. Line them up two ways: the APR, which folds points and fees into one number, and your own break-even math against your honest time horizon. When a lender's "amazing rate" only exists behind a wall of points, the APR usually says so out loud.