What Are Mortgage Discount Points and When Do They Make Sense?
When you apply for a mortgage, you may hear the term “discount points.” Although it’s a familiar concept to lending professionals, the term isn’t self-explanatory for many borrowers, especially first-time homebuyers in Monroe and throughout Ouachita Parish.
Discount points are optional upfront fees you can pay at closing to lower your mortgage interest rate. There are limits to how much a rate can be reduced, and lenders cap the number of discount points that can be applied to a loan.
They are not part of your down payment, and they do not increase your equity. Instead, they let you reduce your mortgage rate by paying extra cash up front.
How Much Do Discount Points Cost?
One discount point costs 1% of your loan amount. If you borrow $300,000:
1 point costs $3,000
2 points cost $6,000
In exchange for paying that fee at closing, your lender agrees to lower your interest rate by a set amount, usually 0.125% to 0.25%. The exact amount varies based on market conditions and lender pricing.
A lower mortgage interest rate typically means a lower monthly payment and less total interest paid over time. For example, on a $300,000 loan with a 30-year term:
At 7.00% → your payment is approx. $1,996/month (principal & interest)
At 6.75% → your payment approx. $1,946/month
That’s about $50/month difference with a 0.25% rate discount, or $600 each year.
What Does Not Change With Discount Points
Your loan balance
Your equity at closing
The benefit only appears over time through lower interest charges.
The Break-Even Rule
The real question to answer before you invest in discount points is, “Will I stay in the home long enough to recover the upfront cost?”
You can figure that out using the break-even formula:
Cost of points ÷ Monthly savings = Number of months to break even
For example:
1 point costs $3,000
That lowers your payment by $50 per month
$3,000 ÷ $50 = 60 months
In this example, it would take five years to recover what you paid upfront.
If you sell or refinance before 60 months, you likely will not recover the upfront cost of the points. If you stay longer than 60 months, you may come out ahead.
When Discount Points Make Sense and When They Don’t
Discount points may make sense if:
You plan to stay in the home for many years
You do not expect to refinance in the near future
You have sufficient savings beyond your down payment and emergency fund to afford them
For homeowners in Monroe and Northeast Louisiana who expect to stay put long-term, the math can work in their favor.
On the other hand, discount points may not be the right fit if:
You may move within a few years or you are unsure how long you will keep the home
You anticipate refinancing
Paying points would stretch your savings too thin
You prefer flexibility in how you apply extra money to your loan
What About Paying Extra Toward Principal Instead?
Some borrowers ask whether it’s better to skip points and simply make extra principal payments.
Extra principal payments:
Reduce your loan balance immediately
Lower the principal amount interest is calculated on
Help you build equity faster
Are optional, so you can start or stop at any time
Discount points:
Do not reduce your loan balance
Permanently lower your interest rate
Reduce your required monthly payment
Only pay off if you keep the loan long enough
Are not refundable
Extra principal payments offer flexibility. You can adjust how much extra you pay each month or stop paying extra altogether if your budget changes. Points are a one-time payment made at closing.
For borrowers who are unsure how long they’ll stay in the home, making extra home loan principal payments may feel more flexible. Those extra payments reduce your loan balance immediately and increase your equity, without requiring a large upfront payment at closing.
That extra savings can really help when you’re already managing a down payment, closing costs, and the expenses that often come after moving into a new home, such as replacing appliances, repairing a roof, or upgrading an HVAC system.
This isn’t a binary choice; you can do both. For example, you could get discount points up front and then, in the future, start making extra principal payments when your budget allows for it.
Speak With Local Monroe Lending Professionals About Your Mortgage Options
Mortgage decisions are rarely one-size-fits-all. The right choice depends on your timeline, your budget, and your long-term plans in Monroe and the surrounding communities.
If you would like help reviewing your mortgage options or calculating whether discount points make sense for your situation, call Ouachita Valley Federal Credit Union at 318.387.4592. Our local lending team can walk you through the numbers so you can make a decision that fits your goals.
