- March 26, 2025
- Posted by General Electric Credit Union
- 5 read
What Are Mortgage Points?
If you're exploring mortgage options, you may have come across the term "mortgage points." But what are points on a mortgage, and how do they impact your home loan? Understanding mortgage points can help you make a more informed decision about whether purchasing them aligns with your financial goals.
Discount points are optional fees paid to reduce your interest rate. One discount point typically costs 1% of the loan amount and can lower the interest rate by around 0.25%, though this varies by lender.
Origination fees, sometimes known as origination points, are fees charged by the lender to cover the cost of processing the loan and are not optional. Unlike discount points, origination fees do not reduce your interest rate and instead function as a lender fee.
On a $300,000 loan, one mortgage point would cost $3,000. Purchasing one point could lower the interest rate from 6.5% to 6.25%, potentially saving thousands over the life of the loan.
However, savings depend on how long you keep the mortgage. To determine whether buying points is worth it, consider your break-even period—the time it takes for interest savings to exceed the upfront cost.
Mortgage points can be a useful tool to lower your interest rate and save money over time, but they aren’t always the best choice for every borrower. Before deciding, consider how long you plan to stay in the home, your available funds at closing, and whether the potential savings outweigh the upfront cost.
If you're wondering whether mortgage points are right for you, consult with a team member at General Electric Credit Union. We'll walk you through the options and help you find the right mortgage for your unique situation. Schedule an appointment and get the ball rolling on your homebuying journey today!
What are mortgage points (and the different types)?
Mortgage points are fees paid upfront to a lender at closing in exchange for a reduced interest rate on your loan. They are also known as discount points and can help lower your monthly mortgage payment over time. There are two main types of mortgage points.Discount points are optional fees paid to reduce your interest rate. One discount point typically costs 1% of the loan amount and can lower the interest rate by around 0.25%, though this varies by lender.
Origination fees, sometimes known as origination points, are fees charged by the lender to cover the cost of processing the loan and are not optional. Unlike discount points, origination fees do not reduce your interest rate and instead function as a lender fee.
Are mortgage discount points right for me?
Mortgage points can be beneficial in certain scenarios, but they aren’t the right choice for everyone. Here’s when they make sense—and when they don’t.When mortgage discount points are ideal:
- You plan to stay in your home long-term. Since mortgage points lower your interest rate, the longer you stay in your home, the more you can save on interest.
- You can afford to pay more upfront. If you have the extra funds at closing, purchasing points can save you money over time by reducing your overall loan cost.
- You’re locking in a fixed-rate mortgage. If you opt for a fixed-rate loan, mortgage points can provide lasting savings over the life of the loan.
- You want a lower payment. Since mortgage points lower your interest rate, this allows you to reduce your monthly payment.
When mortgage discount points may not be worth it:
- You plan to sell or refinance soon. If you move or refinance within a few years, you may not recoup the upfront cost of the points.
- You need cash for other expenses. If paying for mortgage points stretches your budget too thin, it may be better to keep those funds available for emergencies, home improvements, or other financial priorities.
- You qualify for a low-interest rate without points. If you already have a competitive rate, purchasing points may not provide significant savings.
How much do mortgage points cost?
The cost of mortgage points varies based on the loan amount and the number of points purchased. Generally, one mortgage point costs 1% of the total loan amount. For example:On a $300,000 loan, one mortgage point would cost $3,000. Purchasing one point could lower the interest rate from 6.5% to 6.25%, potentially saving thousands over the life of the loan.
However, savings depend on how long you keep the mortgage. To determine whether buying points is worth it, consider your break-even period—the time it takes for interest savings to exceed the upfront cost.
Are mortgage points tax-deductible?
In many cases, mortgage points are tax-deductible. The IRS allows borrowers to deduct discount points as prepaid interest, but specific conditions apply:- The loan must be used to buy or improve your primary residence.
- The points paid must be customary for your area.
- The points must be calculated as a percentage of the loan principal.
Mortgage points can be a useful tool to lower your interest rate and save money over time, but they aren’t always the best choice for every borrower. Before deciding, consider how long you plan to stay in the home, your available funds at closing, and whether the potential savings outweigh the upfront cost.
If you're wondering whether mortgage points are right for you, consult with a team member at General Electric Credit Union. We'll walk you through the options and help you find the right mortgage for your unique situation. Schedule an appointment and get the ball rolling on your homebuying journey today!