Are Mortgage Points Worth It?
As you’re exploring mortgage options, you might be wondering about mortgage points. You hear they can lower your interest rate—but is paying them really worth it?
Let’s break it down clearly.
What Are Mortgage Points?
Mortgage points are fees paid at closing to lower your interest rate or cover loan origination costs:
Discount Points: These reduce your interest rate.
Origination Points: These cover the lender’s costs to originate your loan.
Each point equals 1 percent of your loan amount. On a $500,000 loan, one point costs $5,000.
Do Discount Points Make Financial Sense?
Typically, no—and here’s why:
Let’s say paying one discount point ($5,000 on a $500,000 loan) lowers your interest rate by 0.5 percent. That translates to roughly $167 in monthly savings. At that rate, your "break-even" is about 30 months (2.5 years).
This means you must keep your mortgage for at least 30 months just to recover your initial $5,000 investment. But here's the real issue: many homeowners calculate their savings over the full loan term (often 30 years), believing they'll benefit significantly. Yet the average homeowner holds their mortgage for only about four years—due to refinancing, selling, or restructuring.
If you refinance or sell before reaching that break-even point, you lose the unused portion of what you paid in discount points. You won’t necessarily lose all $5,000, but you'll lose whatever you haven't yet "earned back" through monthly savings. The sooner you refinance or sell, the more of that initial investment you lose.
In short, the risk vs. return assessment often appears attractive initially, but it's fundamentally flawed since most homeowners won't hold their mortgage long enough to reap the projected savings.
What About Origination Points?
Origination points cover the lender’s processing costs—but in today’s lending environment, you usually shouldn’t pay these fees. They aren’t standard except in specialized programs (like Down Payment Assistance).
If your lender tries to charge origination points for a conventional loan, push back, negotiate, or look elsewhere.
When Paying Discount Points Makes Sense
There’s one scenario when paying discount points does add up:
You anticipate interest rates will rise significantly, and
You expect to keep your mortgage longer than your break-even period.
If both conditions apply, discount points may help protect you from future rate increases and save you money long-term. But if you're like most homeowners—refinancing or selling sooner rather than later—it rarely pays off.
A Better Option: Temporary Rate Buydowns
Instead of permanent discount points, consider a temporary rate buydown funded by the seller or builder. With temporary buydowns (such as a 2-1 buydown), your monthly payments are reduced significantly during the initial years of the loan.
The best part? If you refinance or sell early, the unused portion of the temporary buydown is refunded to you at closing. Unlike permanent discount points, temporary buydowns carry no break-even risk—you always capture their full value.
Bottom Line: Think Short-Term Reality, Not Long-Term Theory
Many lenders showcase impressive savings based on a 30-year scenario, but this calculation isn't aligned with how homeowners typically behave. When you consider the average homeowner only keeps a mortgage for about four years, permanent discount points rarely deliver the promised savings.
Be strategic:
Skip discount points if you’re likely to refinance or sell in a few years.
Avoid origination points unless specifically justified.
Choose temporary seller-funded rate buydowns for immediate savings without risk.
Not sure what's best?
Get a free Strategic Mortgage Audit from The Lassig Team. We’ll provide clear, unbiased guidance to help you make the smartest financial decision possible.
