When it comes to home financing, every percentage point on your mortgage rate can make a big difference over time. One strategy some buyers consider is paying discount points. But what exactly are discount points, and when does it make sense to use them?
Let’s break it down.
Discount points are a type of upfront fee you can choose to pay at closing in exchange for a lower interest rate on your mortgage. Think of it as paying interest in advance to lock in savings over the life of the loan.
Each discount point typically costs 1% of the total loan amount. For example, if you’re borrowing $300,000, one point would cost $3,000.
In return, you get a reduced interest rate. The exact reduction varies depending on the lender and market conditions, but the goal is always the same: lower long-term interest costs.
Paying for discount points is essentially a trade-off. You’re spending more upfront to save money over time. Here’s why it might be worth considering:
If you’re planning to stay in the home for many years, the upfront cost of discount points can be outweighed by the interest savings. The longer you stay, the more time you have to “break even” and then benefit from the lower rate.
By reducing your interest rate, discount points can help lower the interest portion of your monthly mortgage payments. While you’re not reducing the balance you owe, you’re shrinking the interest cost tied to that balance.
If you’ve got extra cash available—maybe from savings or proceeds from a previous home sale—using some of that to buy down your rate can be a smart way to put those funds to work.
Like any mortgage strategy, discount points aren’t one-size-fits-all. Here are a few times it might not be the right move:
A key part of deciding whether to buy down your rate is figuring out your break-even point—how long it will take before the interest savings outweigh the upfront cost.
Break-Even (in months) = Cost of Points ÷ Monthly Interest Savings
So if you pay $3,000 in points and save $50/month on interest, your break-even point would be 60 months (or 5 years).
If you plan to stay in the home longer than that, paying points could work in your favor.
Let’s say a couple is buying a $350,000 home and planning to stay there for at least 10 years. They’re offered the option to pay 1 point ($3,500) to lower their interest rate.
They run the numbers and see it would save them about $40/month in interest. That means their break-even point is around 88 months—just over 7 years.
Since they plan to stay for 10 years or more, buying the point could save them thousands over the life of the loan.
Discount points can be a valuable tool to manage your long-term housing costs, but they’re not a blanket solution. It all comes down to your timeline, your budget, and your goals.
The good news? You don’t have to figure it out alone.
A mortgage professional can help you compare scenarios—buying points vs. not—and walk you through your options in plain English. It’s about finding the right balance between upfront costs and long-term value.
Curious if discount points make sense in your situation? Let’s talk it through.
At Ruoff Mortgage, we understand that buying a home is one of life’s biggest moments – not just as a financial decision, but a personal one. For more than 41 years, we’ve proudly helped families turn their dreams into reality. From our roots in northeast Indiana to now serving homebuyers throughout the Midwest, our focus has stayed the same: delivering exceptional service rooted in care, speed, and community. With an average 15-day clear-to-close time, our team is here to make your journey to homeownership as smooth and stress-free as possible. When you're ready to take the next step, we’re here to walk with you, every step of the way.