Mortgage rates and discount points significantly impact home loan costs. This article explains how rates are determined, what discount points are, and when paying points makes financial sense.

Mortgage rates represent the cost of borrowing money to purchase a home, expressed as an annual percentage of the loan amount. Even small rate differences—measured in fractions of a percentage point—translate to thousands of dollars over the life of a 30-year loan. Rates fluctuate based on broader economic conditions, Federal Reserve policy, inflation expectations, and individual borrower factors such as credit score, down payment size, and loan type. Understanding what drives interest rates and how to secure favorable terms helps homebuyers minimize long-term costs.

Discount points, also called mortgage points, are optional upfront fees paid at closing to reduce the interest rate on a home loan. One point equals one percent of the loan amount and typically lowers the rate by about 0.25 percent, though the exact reduction varies by lender and market conditions. Paying points increases closing costs but reduces monthly payments and total interest paid over time. This rate buydown strategy benefits buyers who plan to stay in the home long enough to recoup the upfront investment through monthly savings.

Break-even analysis determines whether purchasing discount points makes financial sense. Calculate how many months of reduced payments are needed to recover the cost of the points. For example, if paying $3,000 for points saves $50 per month, the break-even period is 60 months. Buyers planning to own the home beyond this period save money overall, while those expecting to sell or refinance sooner may prefer to preserve cash and accept a slightly higher rate. Consider personal liquidity needs, loan term, and market conditions when deciding whether to buy down the rate.

Rate locks protect borrowers from rate increases during the loan processing period, typically lasting 30 to 60 days. Locking in a rate at application ensures the quoted terms remain valid through closing, even if market rates rise. Some lenders offer float-down options that allow borrowers to capture lower rates if markets improve before closing, though these features may carry additional fees. Comparing APR—which includes both interest rate and closing costs—across lenders provides a more complete picture of total loan costs than interest rate alone. By understanding mortgage rates, evaluating discount points strategically, and timing rate locks effectively, homebuyers secure financing that aligns with both immediate budget constraints and long-term financial objectives.