Points vs Rate: How to Compare Mortgage Offers With Different Points and Rates
Offer A: 6.75% rate, 0 points, $5K closing costs. Offer B: 6.50% rate, 2 points ($8K), $5K closing costs. Offer B costs $13K upfront but saves $167/month. Breakeven: 78 months ($13K / $167). If you stay 78+ months, Offer B wins. Here's how to compare mortgage offers.
Mortgage shopping involves comparing offers with different combinations of interest rates and discount points. Points (also called discount points) are prepaid interest that permanently lowers your rate. One point costs 1% of the loan amount. The challenge is comparing offers where one has a higher rate and lower upfront cost, while another has a lower rate but higher upfront cost. The correct comparison method depends on your time horizon, available cash, and financial goals. Start with mortgage basics →
Real-world example: $400,000 loan. Offer A: 7.0% rate, 0 points, $5,000 closing costs. Payment: $2,661. Offer B: 6.5% rate, 2 points ($8,000), $5,000 closing costs. Total upfront: $13,000. Payment: $2,528. Savings: $133/month. Breakeven: $13,000 / $133 = 98 months (8.2 years). Offer C: 6.75% rate, 1 point ($4,000), $5,000 closing costs. Payment: $2,595. Compared to Offer A: $66/month savings, breakeven 59 months. If you plan to stay 10 years, Offer B saves the most long-term. If you plan to stay 5 years, Offer A is best. Detailed guide to mortgage points →
How to Compare Offers with Different Points
The first step is to standardize the comparison. Ask each lender for a Loan Estimate showing the interest rate, APR, points, closing costs, and monthly payment for the same loan amount and property type. Create a comparison table with three columns: upfront costs (points + closing costs), monthly payment, and interest rate. Calculate the total cost over your expected time horizon: Total Cost = Upfront Costs + (Monthly Payment x Months Planned). The offer with the lowest total cost for your specific time horizon is the best deal. Do not compare APRs alone — APR spreads costs over 30 years regardless of your actual plans. If you plan to stay 5 years, the 30-year APR may be misleading. How amortization affects interest costs over time →
Breakeven Analysis
Breakeven analysis tells you how long it takes for the monthly savings from a lower rate to offset the higher upfront cost of points. Formula: Breakeven (months) = Extra Upfront Cost / Monthly Savings. Compare Offer B (2 points, lower rate) to Offer A (0 points, higher rate). Extra upfront cost = $8,000 (points). Monthly savings = $133. Breakeven = 60 months (5 years). If you plan to stay longer than 5 years, buying points saves money. Each point has its own breakeven — the first point typically has a shorter breakeven than the second point. Ask lenders for incremental pricing: what is the rate for 0 points, 1 point, 2 points? Calculate each breakeven separately to find the optimal number of points. How DTI affects the rates available to you →
APR vs Interest Rate
The Annual Percentage Rate (APR) includes the interest rate plus points, broker fees, and certain closing costs spread over the loan term. APR is always higher than the interest rate when points or costs are involved. However, APR assumes you keep the loan for the full term — it does not reflect your actual costs if you sell or refinance early. Use APR as a screening tool to identify potentially expensive loans, but make your final decision based on total costs for your expected time horizon. A loan with a lower APR but higher upfront points may be more expensive if you move in 5 years. A loan with a higher APR but lower upfront costs may be cheaper short-term but more expensive long-term.
Lender Credits vs Points
Lender credits are the opposite of points. Instead of paying upfront to lower your rate, the lender gives you a credit to cover closing costs in exchange for a higher interest rate. A lender credit of $5,000 might increase your rate by 0.375% to 0.5%. Lender credits are useful when you have limited cash for closing or when you plan to stay in the home for a short period. The breakeven calculation works in reverse: how many months of higher payments does it take for the credit to be consumed by the higher payment? If you save $5,000 upfront but pay $100/month more, the breakeven is 50 months. If you move before 50 months, the credit was worthwhile. After 50 months, you would have been better off paying closing costs and taking the lower rate. Refinancing considerations when rates change →
How do I compare mortgage offers from different lenders?
Create a spreadsheet with columns for lender name, interest rate, points (dollar amount), total closing costs, and monthly payment. Normalize the comparison by calculating your expected total cost at years 3, 5, 7, 10, and 30. Include all fees in the upfront cost — not just points. The Loan Estimate form (standardized by federal law) makes comparison straightforward because all lenders use the same format. Look at page 2, sections A, B, C, and J for total costs. Be wary of lenders who quote low rates but hide fees in sections that vary by lender. The lowest-cost offer for your specific time horizon is the best deal, regardless of rate or points alone.
Should I always choose the lowest rate?
No. The lowest rate often comes with the highest points and closing costs. The question is whether the upfront investment pays off within your expected time in the home. If you plan to stay 30 years, paying points for the lowest rate is almost always optimal. If you plan to stay 3-5 years, the lowest upfront cost option (highest rate, zero points, possible lender credit) is typically best. The lowest rate is rarely the best choice for short-term homeowners. Always calculate total cost over your expected time horizon rather than focusing on rate alone.
How do I know if buying points is worth it?
Calculate the breakeven period. Divide the cost of points by the monthly payment savings. If the breakeven is shorter than your expected time in the home, points are worth it. A common rule: buy points if you plan to stay 7+ years, skip them if you plan to stay less than 5 years. Between 5-7 years, compare the breakeven to your specific plans. Consider opportunity cost — the money used for points could instead be invested in the stock market. At 7% average stock returns, points need to save more than 7% equivalent to be worthwhile. This makes the breakeven analysis even more important for financially sophisticated buyers.
What is the difference between discount points and origination points?
Discount points (what most people refer to as points) are prepaid interest that lowers your rate. They are tax deductible as mortgage interest. Origination points are fees charged by the lender for processing the loan. They do not lower your rate and are treated differently for tax purposes. Some lenders call all fees points, so always ask: does this point lower my interest rate? If the answer is yes, it is a discount point. If no, it is an origination fee or junk fee. Avoid paying origination points — negotiate for lower fees or a lender credit instead.