Lender Points
Paying Upfront to Save Long-Term
When you get a mortgage quote, you’ll often see a "Rate" and a "Points" charge. A point is simply a fee equal to 1% of your loan amount. If you are borrowing $150,000, one point equals $1,500.
Not All Points are Created Equal
There are two types of points you might see on your loan estimate:
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Discount Points (The "Good" Points): These are essentially prepaid interest. By paying these upfront, you "buy down" your interest rate for the entire life of the loan. Best of all? They are usually tax-deductible.
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Origination Points (The "Fee" Points): These are charged by the lender to cover their administrative costs or to increase their profit. They don’t lower your rate, they aren't tax-deductible, and most buyers try to negotiate these away.
The Strategy: Should You Pay Points?
Deciding to pay points depends on one major factor: How long do you plan to keep the home? You need to stay in the house long enough to reach the "Break-Even Point"—the moment where your monthly savings finally outweigh the upfront cost.
By the Numbers: The Break-Even Calculation
Imagine a $165,000 mortgage:
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Option A: 6% Interest | 0 Points | Monthly Payment: $989
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Option B: 5.5% Interest | 2 Points ($3,300) | Monthly Payment: $937
The Result: You save $52 per month with Option B. To find the break-even point, we divide the cost by the savings:
$3,300 ÷ $52 = 64 Months (Approx. 5.3 Years)
The Verdict:
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If you plan to sell or refinance in under 5 years, keep your cash and take the higher rate.
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If this is your "forever home," paying the points will save you tens of thousands of dollars in interest over the decades.