What is Buying Points?

Introduction to Mortgage Rates and Points

When you’re shopping for a mortgage, you’ll quickly realize that the interest rate isn’t just a number—it’s a major factor that shapes your monthly payment and the total cost of your loan. Terms like “buying points” or “getting a par rate” often come up, and for many first-time buyers, they can sound like financial jargon.

But understanding these terms could be the difference between saving thousands of dollars and overpaying for your mortgage. In this article, we’ll break down exactly what it means to buy points or get a par rate when mortgage shopping, explore real-life examples, and provide tips to help you make the smartest choice for your financial future.

Why Understanding Rates Matters for Homebuyers

Buying a home is often the biggest financial decision most people make. A small difference in your mortgage rate can lead to significant changes in your monthly payment and the total amount you pay over the life of the loan.

For example:

• A 0.25% rate difference on a $300,000 loan could mean paying $15,000 more or less over 30 years.

• Choosing whether to buy points or stick with a par rate is essentially deciding whether to pay more upfront to reduce your long-term costs.

This is why it’s critical to understand how mortgage points and par rates work.

What Are Mortgage Points?

Definition and Basic Concept

Mortgage points, often called discount points, are fees paid directly to the lender at closing in exchange for a lower interest rate. One point typically costs 1% of your loan amount.

For example:

• Loan amount: $250,000

• 1 point = $2,500

• That $2,500 payment reduces your interest rate, often by about 0.25%.

Types of Points: Discount Points vs. Origination Points

Not all points are the same:

• Discount Points: Prepaid interest that lowers your rate.

• Origination Points: Fees charged by the lender to process the loan. These do not lower your rate.

How Much Does a Point Cost?

The cost of a point depends on your loan amount. Here’s a quick table:

Loan Amount Cost of 1 Point Approx. Rate Reduction

$200,000 $2,000 0.25%

$300,000 $3,000 0.25%

$400,000 $4,000 0.25%

What Is a Par Rate in Mortgage Lending?

Definition of Par Rate

The par rate is the interest rate offered by a lender without charging you points or giving you a credit. It’s the “baseline” rate—no extra upfront costs, no discounts.

How Lenders Determine the Par Rate

Lenders base the par rate on:

• Market conditions

• Your credit score

• Loan-to-value ratio (LTV)

• Debt-to-income ratio (DTI)

Par Rate vs. Above Par vs. Below Par

• Par Rate: No points paid, no credits given.

• Below Par Rate: You buy points to lower your interest rate.

• Above Par Rate: The lender gives you a credit (reducing upfront costs) in exchange for a higher interest rate.

Buy vs. Not Buy: Comparing Points and Par Rate

The Financial Trade-Offs

• Buying points = Higher upfront cost, lower monthly payments.

• Sticking with par rate = No upfront cost, slightly higher monthly payments.

• Taking above par = No upfront cost, but higher payments long-term.

Break-Even Analysis: When Points Make Sense

You should calculate the break-even point, which is the time it takes for your monthly savings to equal the upfront cost of the points.

Example:

• Cost of 1 point: $3,000

• Monthly savings: $50

• Break-even: $3,000 ÷ $50 = 60 months (5 years)

If you plan to stay in the home longer than 5 years, buying points may be a smart move.

Real-Life Examples of Buying Points

• A buyer planning to live in their home for 20 years saves tens of thousands by buying points.

• A buyer planning to sell in 3 years may lose money by paying for points.

Pros and Cons of Buying Mortgage Points

Benefits of Buying Points

• Lower monthly payments

• Save money over the life of the loan

• Possible tax deductions (consult a tax advisor)

Drawbacks and Risks to Consider

• High upfront cost

• Not ideal if you sell or refinance soon

• You may need cash reserves for other expenses

Who Should Consider Buying Points?

First-Time Buyers

Often don’t benefit because they may sell or refinance sooner.

Long-Term vs. Short-Term Homeowners

• Long-term homeowners: Buying points can save thousands.

• Short-term homeowners: Par rate or above par may be better.

Practical Tips for Mortgage Shopping

Questions to Ask Your Lender

• What is today’s par rate?

• How much does each point cost?

• What’s my break-even point?

Comparing Loan Estimates

Always compare the Loan Estimate (LE) from at least 3 lenders.

Using Online Mortgage Calculators

Mortgage calculators help you run “what-if” scenarios to see your break-even point.

Common Misconceptions About Mortgage Points

“Points Always Save Money” Myth

Not true—sometimes they cost more if you move or refinance early.

Misunderstanding Par Rate Offers

Some buyers think par rate means the “best rate.” In reality, it’s just the baseline option.

FAQs About Mortgage Points and Par Rate

Q1: Are mortgage points tax-deductible?
Yes, discount points may be deductible if they’re prepaid interest, but check with a tax professional.

Q2: How much does 1 point lower your interest rate?
Typically about 0.25%, but it varies by lender.

Q3: Should I buy points if I plan to refinance soon?
No, because you likely won’t reach your break-even point.

Q4: Is it better to buy points or take a lender credit?
It depends—credits reduce upfront costs but increase monthly payments.

Q5: Can I negotiate points with my lender?
Yes, lenders sometimes adjust point costs based on market conditions.

Q6: What’s the safest option for first-time buyers?
Often, sticking with the par rate is best unless you’re sure you’ll stay long-term.

Conclusion: Making the Smart Choice for Your Mortgage

Understanding what it means to buy points or get a par rate when mortgage shopping empowers you to make smarter financial decisions. Buying points can save money if you plan to stay in your home for a long time, but for short-term homeowners, the par rate—or even above par—may be a better option.