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Mortgage discount points can lower rates, but require a break even
A typical one discount point equals 1% of the loan amount and often reduces a rate by about 0.25%, so borrowers should compare upfront cost versus monthly savings.
Mortgage discount points are optional fees some borrowers pay to their lender in exchange for a lower mortgage interest rate. Points are calculated as a percentage of the loan amount, where one point equals 1% of the loan value.
As a rule of thumb, paying one discount point typically lowers the interest rate by 0.25%, though the exact “cost to reduction” can vary by lender and pricing strategy. For example, one point on a $400,000 mortgage would cost $4,000, and on a 7% loan that would often reduce the rate to about 6.75%.
Yahoo Finance notes that whether paying points makes sense depends largely on how long you plan to keep the mortgage. Borrowers can run a breakeven analysis by dividing the total cost of the points by the monthly savings, which shows how many months it takes to recoup the upfront fee.
In the example cited, one discount point on a fixed 30-year $400,000 mortgage at 7% lowers the rate to 6.75% and saves about $67 per month, implying a break even in roughly 60 months, or about five years. If a borrower sells or refinances before reaching breakeven, the upfront payment may not translate into the expected savings.