Mortgage Points vs Rate Trade Off

Introduction

The mortgage points vs rate trade-off is the choice between paying discount points upfront (to lower your rate) or accepting a higher rate (and possibly receiving lender credits). Points increase closing costs but reduce your monthly payment. See What Are Mortgage Points, What Is a Loan Discount Fee, and Mortgage Lender Credits Explained.

Frequently Asked Questions

What is the points vs rate trade-off?

Paying discount points (upfront) lowers your interest rate and monthly payment. The trade-off: higher closing costs now vs. lower payments over time. The opposite is lender credits—accept a higher rate to reduce closing costs.

When do points make sense?

Points can make sense if you plan to keep the loan long enough to recoup the upfront cost through lower payments. Calculate the break-even period and compare to your expected ownership.

How do I calculate break-even?

Divide the cost of the points by the monthly payment savings. The result is the number of months to break even. If you'll own the home longer, points may pay off.

What about lender credits?

Lender credits are the reverse: accept a higher rate to get a credit that reduces closing costs. They can make sense if you're short on cash or plan to refinance soon.