With mortgage rates near their highest point in over a decade, some homeowners are now looking into how to get a lower interest rate. One option would be to pay points upfront to lower the interest rate for the term of the loan.

What are mortgage points?

Discount points, also known as “points,” are an additional upfront cost in exchange for lowering your interest rate.

How do discount points work?

During the loan process, your loan officer will typically offer you multiple rates to choose from. There is usually a base rate and then lower rates that you can get if you purchase discount points. If you choose to lower the rate with discount points, you will be paying the lender a percentage of your loan amount at closing.

When should you pay points on a mortgage?

Paying points will help decrease your monthly payment, but you do increase the upfront costs of your loan.

You can pay points upfront when…

• You need to lower your monthly interest rate to make the mortgage more affordable

• You have extra money to put down and want the upfront tax deduction

  Verify your mortgage eligibility (Apr 26th, 2024)

• You plan to keep your home for a long time so that you may recoup the costs

Often, borrowers instead choose to make larger down payments or make extra payments on their mortgage to build equity in their homes quicker.

Are mortgage points tax deductible?

The cost of points represents prepaid interest, so they can usually be deducted from your taxes just like normal mortgage interest. However, you should consult with your CPA or tax preparer.

If having a low-interest rate is a priority in your home buying process, you should discuss what options are available for your scenario with your loan officer.

Read our blog How to Reduce a Mortgage Rate When Buying a Home to learn more.