Definition
An upfront fee paid at closing to lower a mortgage's interest rate, also called discount points. One point costs 1% of the loan amount and typically trims the rate by around a quarter of a percentage point. The math is a break-even: how many months of payment savings it takes to recover the upfront cost.
Why it matters
Points are prepaid interest, so the answer depends entirely on how long you keep the loan: past break-even they save money every month, before it they are a loss, and refinancing or selling resets the clock. Advertised rates often quietly assume points, hiding the upfront cost.
Example
On a $400,000 loan, one point costs $4,000 and cuts the rate from 6.75% to 6.5%, saving about $66 a month. Break-even lands around 61 months: a buyer keeping the loan ten years comes out well ahead, while one who refinances in year three eats a net loss of about $1,600.
Put it into practice
Related terms
This definition is educational, not financial, legal, or tax advice. U.S. rules and limits change; verify time-sensitive details with official sources. See our disclaimer.