Kristen Ambos
Chief Production Officer-Midwest | NMLS: 239731
Chief Production Officer-Midwest | NMLS: 239731
When you're shopping for a mortgage, getting a lower interest rate can feel like the ultimate goal. That can make purchasing mortgage discount points seem like an obvious decision.
But a lower quoted rate is only one part of the equation.
Before spending thousands of dollars upfront to buy down a mortgage rate, it can be worth comparing that option with another strategy: keeping more of your cash upfront and voluntarily applying additional money toward the mortgage principal.
Mortgage discount points are an upfront cost borrowers may pay in exchange for a lower mortgage interest rate.
One point generally equals 1% of the mortgage amount.
For example, on a $309,000 mortgage:
1% × $309,000 = $3,090
That means one point would cost $3,090.
How much that point reduces the interest rate is not fixed. Pricing can change based on market conditions, loan characteristics and other factors.
That's why the important question isn't simply, "How much does one point cost?"
It's also, "How much will this point save me, and how long will it take to recover what I spent?"
A typical mortgage payment includes principal and interest, along with applicable taxes, insurance and other housing expenses.
When you voluntarily apply additional money directly toward principal, you reduce your outstanding mortgage balance faster.
Your contractual interest rate does not change.
Instead, future interest is calculated using a balance that is declining faster than originally scheduled.
Over enough time, that can make a substantial difference.
In Episode 26 of the Always on Point Podcast, Kristen Ambos discusses a client considering a $309,000 mortgage at a 6.99% fixed interest rate.
The client initially wanted to explore buying down the interest rate.
One point would cost approximately $3,090.
Kristen also modeled another option: What would happen if the client kept the existing rate but voluntarily applied an additional $200 each month toward principal?
Under the assumptions used in the example, the additional payment was projected to shorten the mortgage payoff timeline from approximately 30 years to approximately 23 years and reduce total interest by more than $100,000.
The example illustrates why mortgage strategy should involve more than comparing advertised interest rates.
No.
This distinction is important.
If your mortgage has a contractual fixed rate of 6.99%, making additional principal payments does not turn it into a 5.375% mortgage or otherwise change the note rate.
Instead, additional principal payments can reduce the amount of interest you ultimately pay because you owe less principal sooner.
That can produce a long-term interest expense that compares favorably with other hypothetical loan scenarios, but the contractual rate itself remains unchanged.
Discount points may be worth considering when you expect to keep the mortgage long enough for the monthly savings created by the lower rate to exceed the upfront cost.
This is sometimes evaluated using a break-even period.
For example, if buying points costs $3,000 and reduces your monthly principal-and-interest payment by $50, a simplified break-even calculation would be:
$3,000 ÷ $50 = 60 months
That would be approximately five years.
This simplified example does not account for every financial or tax consideration, but it demonstrates why your expected time in the home matters.
Additional principal payments may appeal to borrowers who want to reduce their mortgage balance faster while maintaining more flexibility than an upfront point purchase.
Instead of spending several thousand dollars at closing, the borrower may choose to make additional payments over time.
That flexibility can matter because financial circumstances change.
However, money directed toward a mortgage is also money that is no longer available for other goals. Emergency savings, retirement contributions, higher-interest debt and other priorities should also be considered.
Episode 26 also discusses mortgage rate-lock periods.
This was particularly relevant because Kristen's client was purchasing new construction and the home was not expected to be completed immediately.
Mortgage pricing can vary based on the required lock period. A longer period gives the lender more time between locking the rate and closing the mortgage, which may affect pricing.
Borrowers purchasing new construction should therefore discuss anticipated completion dates and rate-lock options with their mortgage lender early in the process.
The lowest advertised mortgage rate isn't automatically the best financial strategy.
A complete comparison may include:
A mortgage lender should be able to help you understand how those pieces interact rather than simply quoting a rate.
It depends on your individual circumstances. Compare the upfront cost of the points, resulting rate reduction, monthly savings, expected time in the home and potential impact of applying that money toward principal instead.
How a payment is applied depends on the loan servicer and payment instructions. Borrowers who want additional funds applied toward principal should confirm the correct process with their mortgage servicer.
Yes, additional principal payments can shorten the payoff timeline because the outstanding loan balance decreases faster than scheduled.
No. The contractual interest rate remains the same. Additional principal reduces the balance on which future interest is calculated.
Not necessarily. Mortgage repayment is only one part of a financial plan. Emergency reserves, other debts, retirement savings and additional financial priorities should be considered.
The lesson from Episode 26 isn't that every borrower should skip discount points or automatically pay an extra $200 per month.
It's that borrowers deserve to see the comparison.
A mortgage decision can affect your finances for years. Understanding the upfront expense, monthly payment, amortization and potential long-term interest can help you make a more informed choice.
Kristen Ambos, Wisconsin Mortgage Lender at Point Mortgage Corporation, works with borrowers to compare mortgage options and understand how different financing strategies may affect their goals.
Ready to run your numbers?
This article is provided for general educational purposes only and should not be considered financial, legal, tax or investment advice. Mortgage programs, interest rates, underwriting guidelines, qualification requirements and loan availability are subject to change. Individual results vary.
Chief Production Officer-Midwest
Point Mortgage Corporation | NMLS: 239731