How Much Does One Point Save on a Mortgage Rate?

by Tim Plaehn ; Updated July 27, 2017

When a homebuyer selects a mortgage, she can elect to pay extra upfront to buy down the interest rate. The charge to get a lower interest rate is called a discount point. For a range of mortgage interest rates, a lender will have a list of corresponding discount point costs to get a loan at that rate.

Discount Points

One discount point is one percent of the mortgage loan amount. On a $100,000 loan, a point is $1,000. For a $300,000 loan, one point is $3,000. Mortgage lenders will usually charge between zero and one discount point for a standard 30-year mortgage rate. To get a lower rate, a homebuyer will be charged discount points based on a schedule provided by the lender.

Rate Savings

The rate savings by paying discount points is usually a quarter point—0.25 percent—for each discount point paid. If the quoted mortgage rate is 5 percent, paying one point would buy the rate down to 4.75 percent. Most lenders will charge four to six points to lower a mortgage rate by one full percent. This puts the rate savings per point in a range of 0.17 to 0.25 percent.

Payment Savings

The reasons to pay discount points to buy down a mortgage rate are to save on the total interest paid and to have lower payments. For mortgage rates in the 4 to 6 percent range, each quarter-point in rate savings equals about $15 to $16 per month in lower payments on a 30-year, $100,000 mortgage. The lower the interest rate, the higher the monthly savings. A homebuyer who pays one point—$1,000—on a $100,000 mortgage to save $15 per month would earn the point back in 66 months.

Total Interest Savings

Paying points to for a lower rate makes the most sense for a homebuyer who plans to stay in the home for a long time. As an example, a $100,000 mortgage has the rate lowered from 5.5 percent to 5 percent with the payment of two discount points or $2,000. After 10 years, the homeowner has saved $5,385 in interest compared to the higher rate. Over 30 years, the savings would be more than $12,000.

About the Author

Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.