Points, Credits, and the Trade-Off

There's No Such Thing as “The Rate”

For every loan, there isn't one rate — there's a range of rates, each with a different upfront cost. Lower rate? Higher fees. Lower fees? Higher rate.

But that's not how most lenders present it. Most lenders will ask what you're looking for — and if you say “the lowest rate” (which most people do), they'll show you exactly that. One rate. With points baked in. You'll see a great rate and then be shocked by the fees on the Loan Estimate. But you got what you asked for.

What they won't show you — unless you ask — is the full spectrum of options. The same loan at a higher rate with no fees. The same loan with a lender credit that reduces your cash to close. The no-cost option. The par rate.

This is a decision that can cost or save you thousands of dollars — and most borrowers don't even know they're making it, because their lender already made it for them.

How Discount Points Work

A full discount point equals 1% of your loan amount. On a $400,000 loan, one point costs $4,000. In exchange, your interest rate drops.

But you don't have to pay a full point. You can pay an eighth of a point, a quarter, a half — whatever makes sense. The cost-to-rate reduction isn't a fixed ratio either. It depends on the rate sheet that day, and it changes at every increment.

Here's what most borrowers don't know: there are sweet spots on every rate sheet. Wholesale lenders incentivize certain rates — the rate they want brokers to sell that day. At those sweet spots, you get more rate reduction per dollar of points (or more credit per rate bump). A good broker knows where those sweet spots are and can tell you when it makes sense to go an eighth lower — and when it doesn't.

Example:

• No points: 5.750% rate. Payment: $2,334/month.
• 0.5 points ($2,000): 5.625% rate. Payment: $2,302/month.
• 1 point ($4,000): 5.500% rate. Payment: $2,271/month.

Points are sometimes called “buying down the rate.” They reduce your monthly payment for the life of the loan — but you have to stay in the loan long enough to recoup what you paid. More on that →

How Lender Credits Work

Lender credits are the opposite of points. Instead of paying the lender, the lender pays you — in the form of a credit toward your closing costs, both hard and soft.

The trade-off: your rate goes up.

Example:

• No credits: 5.750% rate. Closing costs: $4,500.
• With credit: 6.000% rate. Closing costs: $1,500 (lender credit covers $3,000).

You save $3,000 at closing, but your monthly payment is higher for the life of the loan.

This is a good option if:

• You want to minimize cash out of pocket at closing
• You plan to refinance or sell within a few years
• You'd rather keep your cash liquid than lock it into the mortgage

The “No-Cost” Option

A no-cost loan takes lender credits far enough to cover your hard closing costs — Sections A and B. If there's enough credit, it can cover soft costs (prepaids and escrows) too. Government funding fees (FHA upfront MI, VA funding fee) are exceptions — those typically can't be covered by credits.

“No cost” doesn't mean free. It means you're paying through a higher rate instead of upfront. Hard vs soft costs explained →

But for borrowers who want the lowest cash-to-close — or who aren't sure how long they'll keep the loan — no-cost is worth considering. The only way to know for sure is to run the breakeven math for your specific scenario. The Breakeven Question →

The “Par” Rate

In between points and credits, there's usually a rate where you don't pay anything extra and you don't receive any credit. This is sometimes called the “par” rate — the rate at zero cost.

This is the baseline. Everything above it gives you credits; everything below it costs you points.

When you're comparing lenders, the par rate is the most honest comparison — it strips out the points-and-credits trade-off and shows you the lender's actual pricing.

How to Decide

The right option depends on your circumstances — not a fixed number of years. Ask yourself:

• Do I think rates are going to drop? If rates are likely to come down, you'll probably refinance at some point. Paying points on a loan you're going to replace doesn't make sense.
• Am I likely to move? If there's a chance you'll sell within the next few years, keep your upfront costs low.
• Is my life about to change? Going self-employed, changing careers, retiring — these can make it harder to refinance later. If you're locking in a loan you'll keep for a long time, points might make sense.
• Do I need my cash for something else? Money spent on points is locked into the mortgage. If you'd rather have it available for emergencies, investments, or home improvements, take the credit.

If you're unsure about any of these, lean toward no-cost. You can always refinance into a lower rate later. You can't get your points back.

Our rate tool shows every option on the spectrum — with the breakeven calculated — so you can see the trade-off before you commit.