How mortgage points work

A mortgage point is an upfront fee equal to 1% of your loan amount, paid at closing in exchange for a lower interest rate. On a $400,000 loan, one point is $4,000. Two points is $8,000.

Paying points is often called "buying down the rate." You are pre-paying some interest today to pay less interest every month for as long as you keep the loan.

The only question that matters: break-even

Points make sense when you keep the loan long enough for the monthly savings to earn back the upfront cost. Divide the dollars you pay in points by the dollars you save each month. The result is your break-even, in months.

Keep the loan meaningfully past break-even and the points were a good purchase. Sell or refinance before break-even and you paid for savings you never collected.

Why lenders love advertising bought-down rates

A rate with two points baked in looks better in a headline than the same lender’s no-points rate. That is why comparing offers by rate alone is a trap: a lower rate with heavy points can be a worse deal than a higher rate with none. Always compare rate AND the points or credits attached to it, or simply compare APRs on the same loan size and term.

Quick rules of thumb

• Long holding period and cash available: points deserve a serious look.
• Might move or refinance within a few years: points rarely pay off.
• Comparing two offers: line up the points and credits first, then the rates.
• Never judged in isolation: your break-even is personal math, not a slogan.