What are mortgage points and how do they work?

A mortgage point equals 1 percent of your total loan amount — for example, on a $100,000 loan, one point would be $1,000.

Mortgage points are essentially a form of prepaid interest you can choose to pay up front in exchange for a lower interest rate and monthly payments (a practice known as “buying down” your interest rate).

In some cases, a lender will offer you the option to pay points along with your closing costs. In exchange for each point you pay at closing, your mortgage APR will be reduced and your monthly payments will shrink accordingly.

Typically, you would buy points to lower your interest rate on a fixed-rate mortgage. Buying points for adjustable rate mortgages only provides a discount on the initial fixed period of the loan and isn't generally done.

Pay attention to the numbers

Because you’re paying more up front, the reduced interest rate will only save you money over the long term. The longer you plan to own your new home, the better the chance that you’ll reach the “break-even” point where the interest you've saved compensates for your initial cash outlay. If you have a shorter-term plan, have limited cash, or would benefit more from a bigger down payment, paying points may not benefit you.

Your mortgage loan officer can help you decide whether paying points is an option for you.