When shopping for a mortgage, you may come across the term “mortgage points”—also called “discount points.”¹ Understanding this term could come in handy as you navigate setting the terms of your next home loan.

What are mortgage points?

Mortgage points are upfront fees you can choose to pay at closing in exchange for a lower interest rate on your loan. This is a way to reduce your monthly payments as well as overall interest throughout the life of the loan, which could eventually help you save money over time.¹

One point equals 1% of the total loan amount—added to your closing costs—and it can usually lower your interest rate by about 0.25% for the life of the loan, although the exact rate reduction may vary.¹ For example, one point on a $100,000 home loan with a 6% interest rate costs $1,000, and your interest rate could be reduced to 5.75%. Buyers also typically have the option to buy less than a full point.²

How could mortgage points be useful?

The potential benefit lies in long-term savings. If you plan to stay in a home with the same mortgage for a long period of time, lower monthly payments from a reduced interest rate can eventually outweigh the upfront cost of the point(s). However, if you sell or refinance the home too soon, you might not “break even,” or reach the point when the savings exceed the initial cost.¹