Points

A point is an upfront fee paid to the lender at closing, equal to 1% of the loan amount, in exchange for a lower interest rate. On a $400,000 loan, one point is $4,000. Points are sometimes called discount points to distinguish them from origination fees, which are also charged in points but compensate the lender for processing the loan rather than buying down the rate.

How it works: each point typically buys down the rate by roughly 0.25%, though the exact ratio varies by lender and market conditions. A loan offered at 7.0% with no points might also be available at 6.75% with one point or 6.50% with two points. The borrower trades cash at closing for monthly savings over the life of the loan.

Why it matters: the math is a break-even calculation. The monthly savings from the lower rate, accumulated over the time the borrower keeps the loan, has to exceed the upfront cost for points to pay off. On the $400,000 loan above, one point costs $4,000 and saves about $65 per month, producing a 62-month break-even. If the borrower keeps the loan less than five years, paying the point was a money-loser; if more, it was a savings.

Common gotcha: points are most attractive when the borrower is highly confident they'll keep the loan past the break-even date. Borrowers planning to move in a few years, or who might refinance if rates drop, often skip points and accept the slightly higher rate. The Loan Estimate's page-3 comparison block shows the all-in cost over five years at the quoted rate-and-points combination, which is the right document for this analysis.