What Are Points? The Hidden Cost of Chasing the Lowest Mortgage Rate
When shopping for a mortgage, most borrowers focus on one thing—getting the **lowest interest rate**. And while that’s a smart move, it’s not the whole picture. In fact, the lowest rate on paper often comes with hidden costs in the form of **discount points** or **origination fees**, which can significantly affect your **true cost of borrowing**.
In this post, we’ll break down:
- What mortgage points are
- How points affect your interest rate
- When it makes sense to buy points (and when it doesn’t)
- Why comparing interest rates without understanding fees is risky
- How to shop smarter when comparing lenders
What Are Mortgage Points?
Mortgage points are fees you pay a lender at closing in exchange for a reduced interest rate. This process is called “**buying down the rate**.” One point typically costs 1% of your loan amount. For example, on a $300,000 loan, one point equals $3,000.
There are two main types of points:
1. Discount Points
These are prepaid interest that reduce your interest rate. The more points you pay, the lower your rate—but only up to a certain limit.
2. Origination Points
These are fees the lender charges to originate (set up and process) your loan. They don’t reduce your rate and are essentially a profit line for the lender.
How Do Points Affect Your Mortgage Rate?
Generally, paying one point lowers your interest rate by about 0.25%, but this varies by lender and market conditions. That might not sound like much, but over a 30-year term, it can add up to thousands in interest savings—**if** you stay in the home long enough to break even.
Here’s a simplified example:
- No points: 7.00% rate on a $300,000 loan
- With 1 point ($3,000): 6.75% rate
- Monthly savings: ~$50
Break-even point = $3,000 / $50 = 60 months (5 years). If you sell or refinance before then, you lose money.
Why the Lowest Rate Isn’t Always the Best Deal
When comparing quotes, a lower rate might look better, but you **have to dig into the details**. If one lender quotes you a 6.5% rate and another offers 7.0%, the 6.5% might require you to pay multiple points upfront—costing you thousands in closing costs that may not be worth it depending on your situation.
It’s like seeing two cars:
- Car A: $30,000 with no extra fees
- Car B: $25,000 but with $6,000 in hidden fees
Car B *seems* cheaper until you look under the hood. Same goes for mortgage rates.
When Does It Make Sense to Pay Points?
Buying points can make sense if:
- You plan to stay in the home for 7+ years
- You want to lower your monthly payment permanently
- You have extra cash at closing and want to invest it into the loan
But it may be a bad idea if:
- You’re tight on funds for your down payment or reserves
- You’re not planning to stay in the home long-term
- You’re expecting to refinance in the next few years
How to Shop Smart for Mortgage Rates
Here’s how to avoid getting tricked by teaser rates and make an apples-to-apples comparison between lenders:
1. Ask for a Loan Estimate (LE)
The LE shows the interest rate, points, closing costs, and total monthly payment. Don’t settle for a phone quote—get the actual breakdown.
2. Compare APRs, Not Just Rates
The **APR (Annual Percentage Rate)** factors in both the interest rate and fees, giving you a better picture of total loan cost.
3. Ask: “What does this rate include?”
Make sure the rate quote includes details about how many points (if any) are being charged. If they offer a low rate, ask how much you’re paying to get it.
4. Factor in Your Break-Even Point
How long will it take to recoup the cost of paying points? Will you even live in the home that long?
5. Don’t Let Lenders Skip the Details
Some lenders will quote a lower rate just to get your attention, hoping you won’t notice the added fees until you’re too far in to switch. Be proactive and ask the hard questions upfront.
Let’s Do the Math for You
At Novus Custom Mortgage Group, we don’t play games with teaser rates or hidden fees. We’ll walk you through your options in plain English and help you compare scenarios so you can make the best financial decision for your family.
Want to see how different rates and point structures affect your payment and long-term cost?
Click here to get started with a free custom quote.
Bottom Line
Mortgage points can be a useful tool, but only if you fully understand them. Chasing the lowest rate without looking at the fees behind it can cost you big time. Remember, the best loan isn’t always the one with the lowest rate—it’s the one that fits your **budget, goals, and timeline**.
Need help navigating it all? Let’s talk. I’m here to help you find the right strategy, not just the cheapest headline rate.