Should I Pay Points to Lower My Interest Rate?

When you're comparing mortgage options, your lender may give you the option to pay "points" in exchange for a lower interest rate. That can sound appealing, especially when you're trying to lower your monthly payment, but paying points isn't always the best financial choice.

The key is figuring out how long it will take you to actually benefit from the upfront cost.

What Are Mortgage Discount Points?

Discount points are an upfront fee paid to the lender in exchange for a lower mortgage interest rate.

One point equals 1 percent of your loan amount. For example, one point on a $500,000 mortgage would cost $5,000.

What one point does NOT equal is a guaranteed reduction in your interest rate. The rate reduction you receive varies by lender, loan program, and current mortgage market.

How Do I Know If Paying Points Is Worth It?

This is where I like to look at the break-even point.

Let's say paying $5,000 in points reduces your mortgage payment by $100 per month. It would take 50 months, or just over four years, for those monthly savings to equal the $5,000 you paid upfront.

If you expect to keep that mortgage well beyond four years, paying the points may make financial sense.

If you sell or refinance in two years, you may never recover the upfront cost.

What If I Think Rates Will Drop?

This is an important consideration.

No one knows exactly where mortgage rates are headed. But if you're paying thousands of dollars upfront to permanently lower the rate on a mortgage you expect to refinance relatively soon, the math may not work in your favor.

That doesn't mean you should base your decision on predictions about future rates. Instead, compare what happens if you keep the current mortgage for two years, five years, seven years, or longer.

Could the Seller Pay for the Points?

Potentially.

Depending on the loan program and terms of the transaction, seller concessions may be used toward allowable closing costs that include discount points.

In some situations, negotiating a seller credit toward a rate buy-down can be more valuable to a buyer than negotiating the same amount off the purchase price. Your lender can calculate the actual difference.

Don't Forget About Your Cash

Even if the long-term math favors paying points, think about what else you could do with that money.

You may need cash for your down payment, closing costs, moving expenses, repairs, improvements, or simply maintaining an emergency reserve after closing.

I don't want a buyer saving $100 per month on their mortgage if doing so requires using the last $5,000 in their savings account.

Ask Your Lender to Show You the Math

Before deciding, ask your lender for side-by-side options showing the interest rate, cost of the points, monthly payment, and total costs with and without points.

As a Kitsap County real estate agent, I encourage buyers to look beyond the advertised interest rate. The lowest rate isn't automatically the least expensive loan.

The better question is: How much does it cost to get that rate, and how long will I need to keep this mortgage before that upfront investment actually saves me money?