Mortgage Points Explained:
How to Buy Down Your Interest Rate

The Core Mechanics: What Is 1 Mortgage Point?

Mortgage discount points represent a practice known as **buying down your interest rate**. Think of points as pre-paying your interest directly to the bank at closing so they reward you with a lower monthly interest charge over the life of your loan.

The pricing rules for mortgage points are completely standardized across the lending industry:

• One mortgage point costs exactly 1% of your total loan amount. (Note that this is based on your borrowed loan size, not the home's total purchase price).
• Purchasing one full point typically drops your market interest rate by 0.25% (25 basis points).

Lenders also allow you to buy fractional points. For example, you can buy 0.50 points to trim your rate by 0.125%, or purchase 2 full points to drop your interest rate by a full 0.50%.

Discount Points vs. Origination Points

It is incredibly important to check your Loan Estimate sheet to ensure you don't confuse separate types of closing point structures:

Discount Points are entirely optional. You choose to pay them solely to lower your ongoing interest rate and lower your long-term monthly payment.

Origination Points are non-optional administrative fees collected by some lenders to cover the operational costs of reviewing, underwriting, and processing your loan file. These points increase your upfront closing costs without providing any discount on your interest rate.

Real-World Calculation: A $300,000 Loan Case Study

Let's look at a realistic example using a standard 30-year fixed mortgage with a **$300,000 loan balance** to see how the numbers line up:

Finding Your True Break-Even Window

To determine if buying points is a wise financial choice, you must calculate your **break-even window**. This timeline tells you exactly how many months you need to stay in the home before your monthly savings offset the upfront cost.

Using the example above, let's divide your upfront cost by your monthly savings:

$3,000 Upfront Cost ÷ $50 Monthly Savings = 60 Months

This means your break-even point is exactly 60 months, or 5 years. If you sell the home or refinance your mortgage before reaching year 5, you will lose money on the transaction. If you keep the loan for 10, 20, or 30 years, that initial $3,000 buy-down will save you thousands of dollars in interest over the long haul.

How Interest Buy-Downs Work in Canada

In the Canadian mortgage industry, the phrase "mortgage points" is rarely used. Instead, the practice is officially referred to as an **interest rate buy-down**.

Because Canadian mortgages run on short-term blocks (typically 5-year terms rather than a full 30-year lock), buying down a rate functions differently. Your lower rate only lasts for that specific 5-year term. As a result, calculating a clear break-even point is critical, as you must recoup your upfront buy-down costs entirely within those first 60 months before your mortgage comes up for renewal.

The Checklist: When to Buy Points (And When to Pass)

Buying points is a smart move if:

• This is your long-term "forever home" and you plan to hold the mortgage past your calculated break-even year.
• You have plenty of extra cash savings left over after accounting for your down payment, closing fees, and emergency cash cushions.
• Market interest rates are low and steady, making it unlikely that you'll want to refinance your loan anytime soon.

You should skip buying points if:

• You plan to sell the home, relocate, or upgrade to a larger property within the next 2 to 4 years.
• You anticipate that market interest rates will fall in the near future, as refinancing to a lower rate later would completely wipe out the benefit of the points you paid for upfront.
• Paying for points drains your cash reserves, leaving you without a healthy financial buffer for unexpected home repairs or moving expenses.