When applying for a mortgage, it’s easy to get caught off guard by all the new terms and choices thrown your way. One of the most common questions lenders ask is, “Would you like to pay discount points or a discount fee to lower your interest rate?” At first glance, this can sound like a confusing upsell. But with the right explanation, it can actually be a powerful tool—if it fits your financial goals. This week on The Common Sense Mortgage, we’re breaking down what mortgage points are, how they work, and when they’re worth considering.

What Are Mortgage Points?

Mortgage points—sometimes called discount points—are optional, upfront fees that you pay at closing in exchange for a reduced interest rate on your loan. The cost of each point is typically calculated as a percentage of your total loan amount. In return, each point should reduce your interest rate by disclosed percentage. The exact savings can vary depending on the lender, loan type, and market conditions.

Let’s say you’re borrowing $300,000. One full discount point would cost you $3,000. If that point lowers your interest rate from 7.25% to 7.00%, your monthly payment would be lower—and over time, that savings can really add up. Paying points is sometimes referred to as “buying down the rate,” and it’s a strategy some borrowers use to reduce the overall cost of their mortgage over the life of the loan.

It is important to pause here to point out that lenders have the ability to offer partial discount fees / discount points. This means that rather than a flat 1% or 2% discount fee, you could pay a .50% discount fee to receive a .25% reduction in your interest rate. As we often discuss at The Common Sense Mortgage, this point in the process is a great place to ask questions of your lending professional to gain additional clarity.

Why Would You Pay Points?

The main advantage of paying points is that it reduces your interest rate, which means lower monthly payments and less paid in interest over time. This can be especially appealing if you plan to stay in the home for a long time. For borrowers locking in a 30-year fixed-rate mortgage, the savings can be substantial over the full loan term. Points can also be a way to hedge against inflation or rising rates—getting you a lower rate today that you won’t need to worry about later.

Many borrowers will also leverage seller-paid credits or builder incentives offered in their purchase contract to pay discount points. While there are some program and underwriting guidelines to be considered, this can be a great way to maximize the benefit of those credits and incentives being offered with your specific transaction.

Paying points may also be tax-deductible in some cases, especially if the mortgage is for your primary residence. It’s always wise to consult with a tax advisor to understand how this could benefit your particular situation.

When Points May Not Be Worth It

On the flip side, there are times when paying points may not make sense. If you expect to move within a few years, or plan to refinance in the near future, you may not live in the home long enough to break even on the upfront cost. Similarly, if you’re tight on cash at closing, using that money for your down payment or emergency savings may be a better use of your funds than paying discount points for a lower rate.

Another consideration is how long it takes to reach your break-even point. That’s the moment when the interest savings from the lower rate equals the amount you paid upfront for the points. If that point is six or seven years out, but you think you’ll sell or refinance in three or four, then paying points will ultimately cost more than it saves.

How to Calculate the Break-Even Point

The break-even calculation is pretty straightforward: divide the cost of the points by the monthly savings you’d receive from the lower rate. For example, if you pay $3,000 in points and your lower rate saves you $50 a month, it will take 60 months—or five years—to recoup the cost. Any time beyond that, the lower rate continues to pay off in your favor. But if you sell the home in four years, you’ll have lost money on that deal.

This is why it’s critical to think long-term. Are you planning to stay put for a while? Do you have enough money saved to comfortably cover your down payment and the cost of points? What’s the likelihood of a life change—job transfer, growing family, or a move to a new city—happening within the next few years? These are the kinds of questions you and your lender should explore together.

Ask Your Lender to Run the Scenarios

Before you make a decision, ask your lender to present side-by-side comparisons of your loan terms with and without points. See how each option affects your monthly payment, total interest paid, and upfront costs. A good mortgage professional will guide you through those numbers and help you weigh the pros and cons based on your timeline, lifestyle, and financial plan.

Buying mortgage points isn’t a one-size-fits-all strategy. It works well for some borrowers and not at all for others. What matters is that you understand the mechanics, weigh the long-term implications, and make a choice that supports your broader financial picture.

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Common Sense Takeaway:

Mortgage points can be a smart way to save money in the long run—but only if your plans align with the payoff timeline. If you’re planning to stay in your home long-term and have the cash to spare at closing, they could be a great investment. But if you’re thinking short-term or your budget is tight, you may be better off skipping the points and keeping that money in your pocket. Either way, make the decision with your eyes open and your goals in mind—and never be afraid to ask your lender for a breakdown that makes sense.