What to know

  • Discount points exchange upfront money for a rate reduction.
  • Lender credits can reduce upfront costs, often with a higher rate.
  • Compare matching written quotes over your likely loan timeline.

Understand the exchange

Discount points are upfront costs associated with a lower interest rate. A point is typically expressed as a percentage of the loan amount, but the rate reduction offered for that cost varies. Ask for the actual dollars paid and the actual rate difference, rather than assuming a standard exchange.

A lender credit works in the other direction: it can offset upfront costs, often in exchange for a higher rate. A loan advertised with low closing costs still has economic tradeoffs. Review the full written estimate and distinguish lender credits from seller contributions.

Calculate a simple break-even

Subtract the lower payment from the higher payment, then divide the additional upfront cost by that monthly difference. This shows how many months of payment savings are needed to recover the extra cash. It is a useful screening tool, not a complete return calculation.

Remaining balances, tax treatment, the use of your cash elsewhere, and the possibility of another refinance can affect the decision. If the simple break-even is already longer than your likely loan timeline, the upfront cost deserves particular scrutiny.

Ask for a range of choices

Request the same loan with no points, with points, and with a lender credit if available. Keep the loan amount and lock period consistent. Compare both the costs and the cash you would retain after closing.

Do not spend your last reserve dollar merely to secure a lower advertised rate. A slightly different structure may preserve flexibility. The useful question is which combination of upfront cash and ongoing payment best fits your plans.

MAKE IT CONCRETE

An illustrative point calculation

On a $320,000 loan, one point equals $3,200. If paying that amount reduces the monthly payment by $80, simple payment break-even is 40 months. The actual rate discount and fee depend on the lender and market, so use your own written quote.

Your next-step checklist

  • Ask for dollar costs, not just points.
  • Compare the same lock period.
  • Calculate break-even using the payment difference.
  • Consider cash left after closing.
Run your numbers

Sources & further reading

CFPB: Compare loan offers

Educational information, not individualized financial, legal, or tax advice. Examples are hypothetical. Verify current terms directly with the provider.