How Do Mortgage Points Relate to Interest Rates?

Mortgage points are also referred to as discount points and are a method of prepaying interest on a home loan, notes BankRate. Each point is the equivalent of one point in interest, so paying points on a mortgage is a good way to enjoy a more affordable interest rate on a monthly mortgage.

Homeowners can expect a discount on their mortgage rate of 0.25 percent for every point purchased. Many experts recommend taking the break-even point for points purchases into consideration prior to paying. This is the number of years that a homeowner saves on the mortgage multiplied by the monthly savings and then compared to the cost of purchasing the points.

In general, the more points the homebuyer pays, the lower the rate of the mortgage rate, reports BankRate. When deciding which is best for them, paying points or paying more interest , it is important for homeowners to weigh their options. If the homeowner can afford to make an upfront payment for the points, then they will pay less mortgage interest over time. This is especially true for mortgages that are going to be paid on for a great number of years. For homeowners who do not plan to stay in their homes long, paying points is not the best option, since they will not be paying interest for a long time.