Are mortgage points a good idea when rates are high?

Any time mortgage rates are elevated, it can be tempting to lower your new loan’s interest rate by buying mortgage points. But high rates now are also the reason you may want to nix the idea.

Mortgage points, also called discount points, allow you to prepay some of your mortgage interest at closing in exchange for a lower interest rate over the course of the loan. The cost of one point is 1% of the principal amount you are borrowing. So if your mortgage will be $300,000, the cost of one point would be $3,000.

As for what you get in return, a general rule of thumb is that each point you buy lowers your interest rate by 0.25%, though it varies by lender and loan amount.

Once you know what you’re being offered, an online mortgage calculator can help you determine how much you’d save each month with the lower rate, and therefore how many months it will take you to break even on the cost of the points. Once you hit that break-even point, each additional month you hold the mortgage means you are saving money.

Note that it’s how long you hold the mortgage, not how long you stay in the house. If you don’t expect to stay in your home for a while, you obviously won’t have time to earn back what you spent on points. But even if you do live in the house a long time, there’s another reason points may not make sense. That reason is refinancing.

The high rates that make buying points more attractive also make it likely you’ll refinance your loan at some point in the future, when rates ultimately move lower. And once you refinance, you’ll be ending your opportunity to recoup what you invested in those points.