Mortgage Discount Points: To Pay or Not to Pay? A Complete Guide
When you're navigating the mortgage process, one of the most important decisions you'll face is whether to pay discount points at closing. This choice can significantly impact both your upfront costs and your long-term financial picture, yet there's no universal right answer. The best decision depends entirely on your unique financial situation, timeline, and goals.
At Multiply Mortgage, we believe in empowering you with the knowledge you need to make informed decisions. Let's break down everything you need to know about discount points so you can confidently choose the path that's right for you.
What Are Discount Points?
Discount points are an upfront fee you pay to your lender at closing in exchange for a lower interest rate on your mortgage. Think of it as "permanently buying down" your rate to reduce your monthly payment over the life of the loan.
Here's how it works:
- 1 point = 1% of your total loan amount
- On a $1,000,000 loan, 1 point = $10,000
- On a $500,000 loan, 1 point = $5,000
When you pay points, you're making a trade-off: paying more money upfront to save money over time through a lower monthly payment and reduced interest charges.
Important to understand: The money you pay for discount points is paid at closing and you won't get it back. This isn't a deposit or a refundable fee—it's a permanent cost that needs to be evaluated against the long-term savings it provides.
Understanding Mortgage Pricing: The Three Options
Before diving into whether points make sense for you, it's helpful to understand how mortgage pricing works. You typically have three pricing options:
1. Discount Points (Lower Rate, Pay Upfront)
You pay money at closing to secure a lower interest rate. This reduces your monthly payment,the total interest you'll pay over the life of the loan, and pays down principal slightly faster due to the lower interest rate.
2. Par Pricing (Market Rate, No Cost)
Par pricing means you're at the market rate where you neither pay points nor receive a lender credit. The number of points is zero (par = 0). This is the baseline option where you pay standard closing costs but don't add extra to buy down your rate.
3. Lender Credit (Higher Rate, Closing Cost Help)
You accept a higher interest rate, and in return, the lender provides a credit that can be applied to your closing costs or certain prepaid items. This option helps preserve your cash at closing but means higher monthly payments. Note that lender credits cannot be used for your down payment—they're limited to covering eligible closing costs and prepaids.
A key detail: Interest rates and fees are priced in increments of one-eighth of a percent (0.125%). Rates can also change multiple times throughout the day based on market conditions and events affecting Wall Street or the broader economy. Your Multiply Mortgage Advisors will help you understand the options available for your specific loan program on the day you're locking your rate.
The Break-Even Point: The Math Behind the Decision
The most critical concept in evaluating discount points is the break-even point—the number of months you must keep the loan before the interest savings equal the points you paid upfront.
Real-World Example: $1,000,000 Loan, 30-Year Fixed
Rate
Points
Monthly P&I
Upfront Cost
Break-Even
6.50%
0 pts
$6,321
$0
—
6.375%
0.375 pts
$6,239
$3,750
46 months
6.25%
0.875 pts
$6,157
$8,750
53 months
6.00%
1.5 pts
$5,996
$15,000
46 months
How to interpret this table:
If you choose the 6.375% rate with 0.375 points, you'll pay $3,750 at closing but save about $82 per month compared to the 6.50% rate. After 46 months (just under 4 years), your cumulative savings will equal the $3,750 you paid upfront. Every month after that is pure savings.
The 6.25% option has the longest break-even at 53 months (just over 4 years), so it only makes financial sense if you're confident you'll keep the loan at least that long.
The 6.00% option, while requiring the largest upfront investment of $15,000, also breaks even in 46 months because the monthly savings are more substantial at $325 per month.
General rule of thumb: If you plan to stay in the loan for 4-5 years or more, paying points can be worthwhile. If you expect to sell or refinance within 2-3 years, points typically don't make financial sense.
When To Pay Discount Points
Paying discount points can be an excellent strategy in certain situations. Here are scenarios where this option often shines:
You're Planning to Keep the Loan Long-Term
If you intend to stay in your home for 5, 7, 10, or more years without refinancing, paying points can result in significant savings. Once you pass the break-even point, every month of lower payments adds to your total savings.
Example: Using the 6.00% option above, if you keep the loan for 10 years (120 months), you'll save approximately $39,000 in interest after accounting for the $15,000 upfront cost.
You Have Available Cash and Want to Maximize Long-Term Savings
If you have sufficient cash reserves and aren't depleting your emergency fund by paying points, this can be a smart way to optimize your mortgage costs over time. You're essentially investing upfront cash to guarantee a return through interest savings.
Lower Payment Helps You Qualify (Debt-to-Income Ratio)
This is a situation many people don't initially consider. Some buyers have strong assets and cash reserves, but their monthly income creates a tight debt-to-income (DTI) ratio. Lenders qualify you based on your monthly payment relative to your income, so a lower payment can make the difference between approval and denial.
Real scenario: Sarah has $200,000 in savings, but her DTI is borderline at the 6.5% rate. She can't qualify at a monthly payment of $6,320, but she can qualify at $6,157. By paying 0.875 points ($8,750), she secures the 6.25% rate, lowers her monthly payment enough to meet lender requirements, and still has ample reserves remaining.
Lower Rates Accelerate Principal Accrued (not sure love the title)
Traditional mortgage loans are amortized loans where you pay more interest in the beginning of your loan, and as time goes on, more of your payment goes to principal. On a 30 year loan, it generally takes X years before over half of your monthly payment goes to paying down your principal loan balance, versus interest owed. The lower the interest rate, the lower the overall interest you owe on your loan and therefore the quicker you’ll start paying off principal. (I need to check whether it’s simply you’re paying less overall interest or it changes the timeline but there’s a legit advantage to building equity sooner with a lower rate and I want us to touch on that)
You Value Rate Security and Predictability
Some borrowers simply prefer knowing they've locked in the lowest possible rate and monthly payment. If market rates rise in the future and refinancing becomes less attractive, you'll have the satisfaction of knowing you optimized your rate when you had the chance.
When Lender Credits Make Sense
On the opposite end of the spectrum, accepting a higher rate in exchange for a lender credit can be the smarter choice in these situations:
You Have Limited Cash for Closing Costs
First-time buyers or those who've stretched to make their down payment often benefit from lender credits. By accepting a slightly higher rate, you can offset some or all of your closing costs, preserving precious cash.
Real scenario: Mike is a first-time buyer who's put together his down payment but is tight on cash for closing costs. He also needs to purchase appliances and make some repairs after moving in. By accepting a 6.75% rate instead of 6.50%, he receives a $4,000 lender credit that covers a significant portion of his closing costs, allowing him to keep cash on hand for immediate needs.
You Plan to Sell or Refinance in the Near Future
If you expect to move within 2-3 years or anticipate refinancing when rates drop, paying upfront points doesn't make sense—you won't keep the loan long enough to reach the break-even point. Taking a lender credit helps you preserve cash for your next move.
You Need Liquidity for Other Priorities
Sometimes cash on hand is more valuable than long-term interest savings. If you're starting a business, have anticipated medical expenses, want to maintain a larger emergency fund, or have other important financial priorities, a lender credit helps you maintain financial flexibility.
When Par Pricing Makes Sense
Par pricing—the middle ground where you neither pay points nor receive a credit—is often the right choice when:
You Want a Balanced Approach
You have enough cash to cover closing costs but don't want to tie up additional funds in discount points. You're getting a competitive market rate without sacrificing liquidity.
You're Uncertain About Your Timeline
If you're not sure whether you'll keep the loan for 3 years or 10 years, par pricing removes the risk of either paying points you won't recoup or accepting a higher rate when you end up staying long-term.
Real scenario: Chen has solid savings and can afford closing costs, but she's uncertain about her long-term plans. She might get transferred for work in a few years, or she might stay in the area for a decade. She chooses the par rate (6.5%, 0 points) to avoid the gamble—she gets a good rate without committing extra cash upfront.
You Prefer Simplicity
Some people simply want the straightforward option without the complexity of calculating break-even points and projecting timelines. Par pricing offers competitive pricing without the additional decision-making burden.
Key Factors to Consider in Your Decision
When evaluating whether to pay points, accept a lender credit, or go with par pricing, carefully consider these factors:
Time Horizon
This is the single most important factor. Be realistic about:
- How long you plan to live in the home, or have the loan
- Your job stability and potential for relocation
- Life changes on the horizon (growing family, retirement, etc.)
- Your likelihood of refinancing if rates drop
Cash Position and Liquidity Needs
Assess your financial situation honestly:
- What will your cash reserves look like after closing?
- Do you have an adequate emergency fund (typically 3-6 months of expenses)?
- Are there immediate expenses after moving (furniture, landscaping, repairs, renovations)?
- Do you have other financial goals or obligations requiring cash?
Loan Qualification Requirements
Work with your mortgage advisor to understand:
- Is your DTI ratio tight or comfortable?
- Would a lower monthly payment make qualification easier or enable you to qualify for a larger loan amount?
- Do you have strong assets but limited qualifying income?
Your Financial Personality and Values
Consider what gives you peace of mind:
- Do you prioritize long-term optimization or present-day flexibility?
- Are you comfortable with the gamble of projecting your timeline?
- How much do you value having cash on hand versus locked into your home?
Important Reminders
Market Conditions Change Constantly: The rates and point options available to you depend on current market conditions, which can shift multiple times in a single day based on economic news, Federal Reserve actions, or global events. Your mortgage advisor will present you with real-time options based on the market when you're ready to lock your rate.
Every Loan Program is Different: The specific point and credit options available can vary based on your loan program (conventional, FHA, VA, jumbo, etc.), your credit score, your down payment amount, and other factors.
There's No Universal Right Answer: We can't stress this enough—what makes sense for your neighbor, colleague, or family member may not make sense for you. The "best" choice is highly individual and depends on your complete financial picture and personal circumstances.
The Multiply Mortgage Approach
At Multiply Mortgage, our commitment is to transparency, education, and empowerment. Here's how we approach the discount points conversation:
We Show You All Your Options: We'll present every rate and point combination available for your specific loan program and current market conditions. You'll see the complete spectrum from lender credits to par pricing to discount points.
We Do the Math For You: We'll calculate the break-even point for each option, show you the monthly savings, and project the total costs over different timeframes. You'll have all the numbers you need to make an informed comparison.
We Discuss Your Unique Situation: We'll ask about your timeline, cash position, qualification needs, and priorities. We'll help you think through the factors that matter most to your decision.
You Make the Final Call: Armed with complete information and tailored guidance, you choose the option that aligns best with your financial situation and gives you confidence. We're here to educate and advise, never to pressure or push.
Questions to Ask Yourself
As you evaluate your options, consider these questions:
- How long do I realistically plan to keep this loan? Think beyond the optimistic scenario—what if your job situation changes, your family grows, or market conditions shift?
- What's my cash position after closing? Will paying points leave me with adequate reserves? Would keeping that cash provide important financial flexibility?
- Does my monthly payment affect my loan approval? Am I close to DTI limits where a lower payment would help? Or do I have comfortable qualification margins?
- What's my break-even point for each option? Run the numbers. If I break even in 4 years but plan to stay 10, how much will I save? If I'm unsure about my timeline, is the risk worth it?
- What feels right for my peace of mind? Sometimes the mathematically optimal choice doesn't align with what makes you comfortable. Your mental and emotional well being matters too.
Final Thoughts
The decision about discount points isn't about finding the objectively "correct" answer—it's about finding the right answer for you. The best choice is the one that fits your timeline, aligns with your cash availability, supports your loan approval if needed, matches your life circumstances, and ultimately gives you confidence and peace of mind.
Your Multiply Mortgage Advisor is here to walk you through all your options, answer your questions, and help you make an informed decision. We're committed to ensuring you understand not just the what, but the why behind each choice.
Because when it comes to one of the biggest financial decisions of your life, you deserve complete transparency, thorough education, and genuine support.
Ready to explore your mortgage options? Contact your Multiply Mortgage Advisor today to discuss discount points and find the solution that's right for your unique situation.
Visit us at: www.multiplymortgage.com
This article is for educational purposes only and does not constitute financial advice. Mortgage rates, programs, and options are subject to change and vary based on individual circumstances. Consult with a licensed mortgage professional to discuss your specific situation.