Discount points (“points” to their friends) are a nonrefundable upfront fee paid at closing to lower your interest rate. Think of points as a way to prepay some of the interest on your loan so you can pay less later, and you’re on the right track.

Because they’re an upfront cost, they impact the money you’ll need at closing. Because they lower your interest rate, they affect your monthly payment, the pace at which you pay your loan down (amortization), and the cost of your loan over the years. So… everything – they affect everything.
 
When thinking about points, a good visual is a teeter-totter – with points on one end and your interest rate on the other. The higher the points, the lower your interest. The lower your points, the higher your rate. 

Points are a percent of your loan amount. One point equals 1% of your loan amount. To turn points into a dollar amount, divide the points by 100, then multiply by your loan amount. 

1 point ÷ 100 = 1%
1% x $400,000 =  $4,000

Less round numbers are more common – something more like this: 
1.137 points ÷ 100 = 1.137%
1.137% x $400,000 =  $4,548

In most cases, no. Points are usually optional – whether to pay any and how much if you do. You may even have the option to receive a “lender credit” instead of paying points. 

There are situations where points can’t be avoided. The culprit is most often “Loan-Level Pricing Adjustments” (LLPAs). Learn more about LLPAs below. Specific loan programs and volatile market conditions can also result in loan options that all include some points.  

A lender credit is the mirror image of discount points. Discount points increase your closing costs but reduce your interest rate, while a lender credit reduces your closing costs but increases your interest rate. Picture a teeter-totter with points on one end and your rate on the other. Paying more points increases your closing costs but lowers your rate. 

But what if you want lower closing costs? Just tip the teeter-totter the other way around – increase your rate and you lower points. Push your rate up enough, and points will drop to zero. Go higher still, and points drop below zero., becoming a credit that reduces your costs. 

A “lender credit” is just negative “discount points”. 

Maybe. Maybe not. The best loans for most clients are tied closely to ever-shifting financial markets and priced in 0.001% increments. As pricing bounces around, the odds are low (1 in 1000) that you’ll have an exactly zero-point option (but we can usually get pretty close). 

Other programs come from less market-sensitive portfolio lenders or inventors that round away some of the messiness. These are often priced in 0.125% increments, giving us a better shot at an exactly zero-point option (1 in 8) (if you’re keeping score at home). 

A super-low rate sounds great, doesn’t it? A quest for the lowest possible rate might lead you to lean in on points. Before you make a final decision, we’ll use our Points Analyzer to show you costs, savings, and your breakeven point. If you decide to max out your points, we can hook you up… to a point. (heh)

A couple of limitations put a lid on the most you can pay for points: 

• Regulatory limits: Loan-related costs are usually capped at 3% of the loan amount. This legal limit came about after the housing crisis as a protection from predatory lending. If we bump into it, there are a couple of workarounds we can explore. 

• Practical limits: There’s a point of diminishing return, beyond which paying more points lowers your rate so minimally that paying more becomes a bad deal. The Points Analyzer makes this line in the sand easy to spot.   

You decide on points when we lock your rate. If you’re ready to lock but unsure about which rate to choose, here’s some good news—there’s usually a grace period. Your lock is for a specific rate-and-point combination, but it also freezes a menu of other options (what lenders call “pricing stack”). You can switch from the combination of rate and points you locked to any other. Just say the word, and we’ll make the change.

There are a few things to keep in mind: 
• Initial paperwork: Your initial documents will show the original rate-and-point combination. Sign these promptly to keep your loan moving, even if you’re mulling a change. 
• Updated paperwork: We’ll send updated paperwork to confirm any changes you request.
• Final decision: We need your final choice with enough time to prepare for closing – usually 7 to 10 days before your scheduled closing date.

Yes! If you negotiate a seller credit, we’ll help you assess the best way to spend it – one option is to pay points and lower your rate. You can change your rate lock until about 7 to 10 days before your closing date.

Yes, in two cases:
1) You choose to change them.
2) Something about your loan changes.

Most loans allow a grace period between locking and finalizing your choice of rate and point. We’ll always lock a specific rate and points. But we’ve truly secured all pricing available for your loan at a moment in time—a “pricing stack” in lender-speak. This stack becomes a menu from which you can choose. 

Picture a fancy, farm-to-table restaurant where the menu changes daily. Before you lock, rates change every day, too. As soon as you lock, the chef stops changing the menu. You can change your order, but the menu won’t change. The last call for changes is usually 7 to 10 days before closing. 

The second reason points could change is a change to your loan profile. Don’t lose sleep thinking about this. We’re good at anticipating and avoiding these issues. A reduced loan amount, a lower-than-expected appraisal, or a drop in your credit score (if your credit report expires before closing) are the most common causes. If necessary, we’ll troubleshoot together.  

So glad you asked! The answer: It depends. 

We can probably all agree:
Points that cost more than they save: Bad deal.
Points that save more than they cost: Good deal*.

So the real questions are:
1) How much do they cost? 
2) How much do they save? 

Question 1: How much do points cost? 
Easy. Points are part of your closing costs; they’re itemized to the penny on every loan worksheet we’ve sent you.

Question 2: How much do points save? 
This one’s more layered.  Savings comes from a lower interest rate. Interest affects costs over time – so time is key. And savings are always relative, so we need to compare at least two options to calculate savings. Let’s refine our questions: 
How much more do points cost on Loan B compared to Loan A?
How much lower is the interest rate on Loan B compared to Loan A?
How long will you keep the loan?
How much does the lower rate save you on Loan B versus Loan A over that time?

We’ve got you covered on three of the four:
Costs (1) and rates (2) are on loan worksheets.
Savings (4) is just math**—we’re Math Professionals.

That leaves… 
Question 3: How long will you keep the loan? 
If you know exactly how long you’ll keep your loan, scroll to the “heatmap” on the Points Analyzer. The lowest-cost option will hit you in the face. (Not, like, literally.) But even if the future is unclear, the Points Analyzer is our go-to tool. It’ll highlight the sweet spots for different time horizons so you can zero in on a rate that best matches your best guesses about the future.

*Probably. Money and time turn into 5D Chess with Multiverse Time Travel if you include the time value of money, opportunity cost, and tax considerations. 

**For this math, we want to use the “note” rate, not the APR. 

Great question! Thinking about a break-even point is precisely the right approach.
Points are an upfront cost that buys you monthly savings. The break-even point is how long it takes for the monthly savings to add up to the amount you paid in points.

The intuitive way to calculate a break-even is simple but incomplete:
• You pay $4,000 in points. 
• Your monthly payment drops by $100.
• $4,000 ÷ $100 = 40 months to break even.
This “cash flow” break-even is quick and easy – but misses something.

Why the simple method isn’t enough
To calculate an accurate break-even point, we need to pop the hood and peek inside your monthly payment. Every payment is split between principal and interest.
 
Lower your interest rate, and you get:
• A reduced payment
• Less going to interest
• More going to principal

In other words, a lower rate makes your payment smaller while paying your loan down faster. (Neat trick, right?)

The simple method is fine if you’re comparing loans with the same term (30-year vs. 30-year). The true break-even will be a few months quicker, but… close enough.

However, the cash-flow method falls apart if you want to compare different loan terms. A 15-year loan has a higher payment than a 30-year loan. Does that mean you’re paying more interest? Of course not.

A 15-year loan saves Oodles of Interest (OIA)* because more of each payment goes toward principal.

Your Math Professionals are here to help. 
To make the best decision about points, you need accurate information, including a precise break-even calculation. 

That’s where our Points Analyzer comes in. It shows you the break-even point for every option at a glance, including:
• Cash flow savings (lower monthly payments)
• Interest savings (less interest paid over time)
• Principal reduction (aka “Amortization) (how quickly you’re building equity)
No guesswork and no calculator required. 

*Oodles of interest (OIA) is not an actual mortgage term.  

Points impact your loan costs in two ways:
1) Increased cash at closing: Points increase the money you need to bring to closing.  

2) Savings over time: Points lower your interest rate, which saves in multiple ways.
• Cash flow: A lower rate means a lower monthly payment.
• Interest savings – You’ll pay less total interest over the life of the loan. 
• Amortization: More of each payment goes toward reducing your loan balance, so you build equity faster.
• Tax savings: Points may be tax-deductible if you itemize on your tax return.

We’ve created a Points Analyzer Tool to show how the cash due at closing, cash flow, interest savings, and amortization will play out for your loan. Consult with your CPA for information about your potential tax savings. 

The most common mistake is making decisions based on gut instinct or one-size-fits-all advice instead of analyzing the numbers. A lower interest rate is a shiny object. It’s easy to get drawn in and pay whatever it takes without assessing whether the savings warrant the cost.

The temptation is especially high when the first digit in your rate options changes. Who wouldn’t want 5.875% instead of 6.125%? Or 6.75% instead of 7.125%? 

(Pro-tip: rates ending in 0.125% and 0.625% are frequently a better deal.)
On the flip side, unthinkingly following advice like “never pay points” can oversimplify what is often a nuanced decision. Even the best financial rules of thumb have exceptions.

We aim to give you the tools, information, and support to make confident, fully-informed decisions based on your goals, timeline, and financial situation. 

We’re here to help, and we’ve brought a friend! Our Points Analyzer makes it easy to avoid costly mistakes and find the best path forward for your loan.

You sure get a lot of advice when buying a home – solicited and unsolicited. 

There’s a school of thought that points are always a bad idea. If your mom, dad, aunt, granddad, or maybe even your financial advisor told you to “never pay points” and their opinion is important to you, let us know! We’ll include them in our conversations about points. 

We want you (and your advisors) to have all the information you need to make fully informed choices that align with your financial goals. I’d humbly offer that absolutes like “always” and “never” and value judgments like “good” or “bad” almost always (heh) oversimplify complex decisions. One-size-fits-all advice misses the nuances of individual situations.

Points aren’t inherently good or bad – they’re just a tool. Used wisely, they can be a valuable part of your financing strategy. Used poorly, they can be an expensive mistake. It depends on your goals, resources, loan profile, and current market conditions.

Our only agenda is to provide you with the most accurate inputs to your decision-making process. Introduce us to your trusted advisors. With your permission, we can share a copy of the Points Analyzer for your loan, walk them through the numbers, answer questions, and make sure everyone is comfortable with your decisions. 

(For more context on the origins of this advice, check out our answer to “What are discount points, really?”)

Probably not. Discount points are a nonrefundable, upfront cost, and the savings flow back to you slowly in lower monthly payments. It usually takes years to recoup the cost of points.

If you expect to refinance  – or pay off your loan for any other reason – soon, paying fewer points or taking a lender credit to reduce your upfront costs is usually the better move. 

But before you make a final decision, we’ll analyze your options. A reasonable amount of points that break even quickly could be worth paying. 

When the future is hazy, balance is key. If you get aggressive, pay a lot of points, and sell or refinance sooner than expected, you may only recover a fraction of your upfront cost. 

Choosing a higher rate in exchange for a lender credit keeps your closing costs low – a smart move for the short term. But if you keep the loan longer than anticipated, the higher rate can become an expensive choice over time.

We designed our Points Analyzer to help you sift through the options and strike a balance between competing priorities.  

If your plans include paying a chunk toward your loan balance after closing, we’ll want to analyze points based on your future, lower loan balance. 

Here’s why: 
Points are calculated on your initial loan amount, but the savings accrue on the balance you owe over time. Prepaying your loan reduces the balance on which you’ll enjoy savings, undercutting the benefit you get from points and extending your break-even point. 

The cost of points becomes higher relative to your future savings. Paying 1 point on a $500,000 loan amount costs $5,000. If you pay your loan down to $250,000 shortly after closing, that $5,000 is 2% of the remaining balance – the cost effectively doubles relative to your principal balance. 

Let us know how much you plan to prepay. We’ll adjust the Points Analyzer to give you an accurate view of the numbers so you can make an informed decision. 

First, congrats on negotiating the credit… Well done! 

Money is money. Now that you’ve negotiated a credit, mentally toss it onto the pile. It’s now part of the overall cash you have to cover purchase costs. While a credit from the seller may feel like “free money”, you should spend it as strategically as any part of your resources. 

We’ll help you explore the options and make the most of every dollar. 

Over and over (and over) in this FAQ, I’ve said some version of, “Discount points are an upfront cost paid at closing to lower your interest rate.” Okay fine. But are you curious how points really work, like behind the scenes? Yay! Read on. 🙂

When you close on a mortgage (in the “primary transaction”), an exchange occurs: You get money to buy a home, and your lender gets a piece of paper called a promissory note. The note is your loan – your promise to repay $X at Y% over Z years. 

It’s a valuable piece of paper. Look at your amortization schedule, and you’ll see why. Whoever holds the note stands to collect a lot of interest over time. But, in the short term, promissory notes pose a cash flow problem for lenders. We only have so much money to lend. If we make a bunch of loans and run through our funds, we can’t keep lending – no matter how valuable our stack of promissory notes might be. (And is a lender that can’t lend a lender anymore?)

Happily, there’s a “secondary market” for mortgages, where lenders can sell bundles of loans to replenish our funds to lend again (and again) (and again). Fannie Mae and Freddie Mac make up about 70% of the secondary market. They buy loans from lenders and package and resell them as bonds, called Mortgage-Backed Securities (MBS).

The investors who buy these bonds collect all that interest you pay. What investors are willing to pay for these bonds depends on the interest rate:
• Higher rate: Investors pay a premium because they’ll earn more over time. 
• Lower rate: Investors pay less because they’ll earn relatively less over time. 

We let you “choose your own adventure” regarding your interest rate. But if you choose a lower rate, you’ll reduce the market value of our promissory note. We’ll still be able to sell it, and Fannie Mae will still buy it—but only at a “discount” due to its lower value.

Here’s an example (wildly oversimplified): 
• The going rate is 7%, but you want a 6.5% rate on a $400,000 loan. 
• Due to the below-market rate, Fannie Mae will only pay us  $392,000. 
• We charge you $8,000 in discount points at closing to make up for the difference. 
• We get $8,000 from you + $392,000 from Fannie Mae = $400,000. We’re all set!

Lender credits work the same way: 
• The going rate is 7%, but you’re good with a 7.25% rate on your $400,000 loan. 
• At this higher rate, Fannie Mae will pay us a premium –  $404,000. 
• We pass the extra $4,000 along to you as a lender credit.  
• We get $402,000 from Fannie Mae – $4,000 credit to you = $400,000 back to us. Same-same. 

What’s the point of points?
Let me ask: Do you think lenders profit from discount points? This is a common misconception—and probably why some loving, well-meaning grandfathers say, “Never pay points.” For us, points are a financial tool to equalize the value of loans at different rates. For you, points offer the flexibility to choose loan terms that align with your financial goals.

It’s a fee, but it’s called a “discount”. That’s weird, right?  

The name comes from how loans with different interest rates are priced when they’re sold on the secondary market after closing. Loans with higher rates are more valuable because they generate more income over time. Loans with lower rates are worth less and sold at a “discount” due to the reduced interest income they’ll generate over time. 

If you lock in a lower interest rate, we may lend you $400,000 but get stuck selling your below-market-rate loan for $392,000. To make up for this difference, we charge you $8,000 in discount points at closing.

For more of the backstory, read the answer to “What are discount points, really?” (a little further down). 

Nope. Lenders don’t profit from points. It’s kind of the opposite. Loans with higher and lower rates have different market values when we sell them after closing. Points equalize values so we can earn the same amount, regardless of the interest rate you choose. 

Your perk is flexibility. Choose whatever interest rate best fits your resources and financial goals. Points mean it’s all the same to us. 

The answer to “What are discount points, really?” offers more context. 

Loan Level Pricing Adjustments (LLPAs) are risk-based fees built into the cost of most loans. They’re a paradox – invisible yet potentially the costliest element of your loan. The logic behind LLPAs is simple: Imagine you’re a lender with two loan applications. One borrower has excellent credit and is putting half down. The other has so-so credit and is putting just 5% down.

One loan feels riskier than the other, right? That’s the logic behind LLPAs. Fannie Mae and Freddie Mac buy loans with varying degrees of risk, but they charge LLPAs when they take on added risk. While “LLPA” is a term specific to Fannie and Freddie, most loans (even through other lending sources) include risk premiums. We call them “add-ons”, “pricing hits”, or “adjustors”.

But where are they hiding? Scour your loan documents, and you’ll never find a reference to “LLPA”. But here’s a clue: You pay LLPAs as a percentage of your loan amount. Sound familiar? Like, say… points? And that’s exactly where they live – inside of your discount points. 

Costs can range from a somewhat innocuous 0.125% of your loan amount to 1%, 2%, or even 3% or more. On a $500,000 loan, 0.5% is $2500—they can be expensive! 

Because they’re so consequential to your loan costs, we’re always looking for ways to minimize – or dodge them altogether. We’ll pull back the curtain, explain the LLPAs applicable to your loan, and look for ways to save you a few bucks! 

LLPAs (and their cost) depend on your loan profile. Anything that makes your loan riskier can trigger or increase LLPAs:

Down payment (really Loan-to-Value ratio)
• Generally, a larger down payment lowers LLPAs.
• Below 15% down, things get topsy-turvy – a lower down payment might reduce LLPAs. (This phenomenon is partially due to risk mitigation through mortgage insurance.)

Credit score
• The lower your credit score, the higher your LLPAs. 
• Credit scores are grouped into 20-point ranges. 
• The value of a point varies. A single point (from 719 to 720) might lower costs, but 19 points (from 720 to 739) won’t make a difference.

Property type
• Condos, manufactured homes, and multi-unit properties can trigger higher LLPAs.

“High-balance” loans:
• Fannie and Freddie offer loans above their standard limit in designated high-cost areas – subject to higher LLPAs.

Occupancy
• Non-primary residences (vacation homes and rentals) trigger some of the largest LLPAs.  
• Risk plays a role – you’re less likely to default on a loan that keeps a roof over your head.
• But Fannie and Freddie are also mission-driven – created to promote accessible, affordable homeownership. 
• They’ll finance your vacation cabin or rental – but pry a few extra bucks out of you to subsidize loans aligned with their core mission. 

LLPAs interact with one another, with LTV (your down payment) as the lynchpin. When multiple LLPAs apply, they stack together, increasing total loan costs. Here’s Fannie Mae’s current matrix of LLPAs. If you peeked and went cross-eyed, don’t worry! LLPAs are our obsession, and we love finding ways to minimize or avoid them.

You’re right – you’ll never see a line item labeled  “LLPA” on a Loan Estimate. Applicable LLPAs are built into discount points. 

When we talk about points (and we will talk about points), we automatically talk about LLPAs. (If there are paths to reducing your LLPAs, we’ll talk about them separately, too.)

Nope! Paying in cash is one option. But LLPAs are built into your discount points, so you can use the tradeoff between your interest rate and points to reduce their impact on your closing costs.  

We don’t! Lenders don’t profit from LLPAs – we’re just the middlepeople. 

Fannie Mae and Freddie Mac publish their LLPA schedule. We incorporate applicable LLPAs into your loan pricing (specifically points). After closing, we pass the LLPAs along to Fannie or Freddie with no markups or profit.  

The cost of LLPAs depends on your loan profile. Your occupancy, credit scores, down payment, property type, loan type, and more all come into play. You can see the current matrix of LLPAs here. But let’s look at a couple of examples.

Example 1: 
Your credit score is 780, and you’re buying a single-family primary residence that is 5% down (95% loan-to-value ratio). You’re borrowing $500,000. 
The only applicable LLPA is:
• 0.25% for a 95% LTV loan with a 780 FICO. 
Your cost: 
• $500,000 x 0.25% = $1000

Example 2:
Your credit score is 700, and you’re buying a two-unit rental with 30% down (70% LTV). You’re borrowing $500,000.
The applicable LLPAs:
• 0.875% for 70% LTV with a 700 FICO
• 1.125% for 70% LTV on an investment property
• 0.375%  for 70% LTV on a 2-to-4-unit property 
Total LLPAs are 2.375%.
Your cost: 
$500,000 x 2.375% = $11,875 (!)

If that’s not money you were counting on paying, don’t panic. LLPAs are part of discount points. You can use the tradeoff between points and rate to manage how much of your LLPAs show up as money due at the closing table. 

We’ll use our Points Analyzer to lay out your options in an easy-to-understand way so that you can make the best decision for your goals and budget. 

Saving on LLPAs starts with understanding them. We’ll be your guide. (Honestly, we’re a little obsessed.) If you already have stellar credit or a jumbo-sized down payment, you may have set yourself up for low-to-no LLPAs before we even start. 

But if there’s room to save, we’ll roll up our sleeves:
• Can we improve your credit score? 
Jumping to a higher credit tier can reduce LLPAs. 
• Can we adjust your down payment?
A larger (or occasionally a smaller) down payment can lower LLPAs.
• Should we switch loan programs?
FHA, VA, USDA, State Bond, and other loans aren’t subject to LLPAs. 
• Do you qualify for a waiver?
If you’re a first-time homebuyer, gave up a home due to a divorce, or live in a targeted area, you may be exempt from paying LLPAs. 

Yes! Here are some of our favorite ways to dodge LLPAs: 

First-time buyer exemption:
• If you’re a first-time home buyer with loan qualifying income* below 100% of your area’s median income (AMI), you may be exempt from LLPAs.
 
Current address exemption:
• If your loan qualifying income* is no more than 120% of AMI and you currently live in a targeted area in one of these states, you may be exempt from LLPAs: Arizona, Florida, Georgia, Illinois, Maryland, Michigan, Missouri, New Jersey, New York, Oklahoma, Pennsylvania, Tennessee, Texas, Virginia, or Washington, DC

• You can buy a home anywhere in the U.S. 

• Bonus! This exemption includes Down Payment Assistance and grants totaling up to $9,000. (It’s a good one!)

Super-size your down payment:
• At 40% down, most LLPAs drop to zero. 

Other loan programs:
• FHA, VA, USDA, State Bond, and other programs we offer aren’t subject to LLPAs. 

*What is “Loan qualifying income”? It’s the income an underwriter uses to determine your eligibility for a loan. But what if…
If your base salary is below 100% of AMI, but you also get bonuses. 

If your income is below 100% of AMI, but you’re buying with a partner who also works. We can art-direct your income – excluding any part we don’t need to secure loan approval while maintaining eligibility for an LLPA waiver. Disclaimer: Loan rules, program availability, and down payment assistance can change. These specific options may not be available, but we’ll be up to date on all the latest options.