Mortgage Rate vs APR: Points, Credits and Real Cost

Many buyers compare only the headline mortgage rate. Smart borrowers compare APR and the cash required at closing. Discount points and lender credits shift costs between upfront and monthly.

Key takeaways

• The interest rate drives your monthly payment; APR estimates total borrowing cost including certain fees.
• Discount points buy down the rate upfront; lender credits raise the rate to reduce cash due at close.
• Buying points only pays if you keep the loan past the breakeven; otherwise consider credits or no-points pricing.

Key definitions

• Interest rate: the nominal rate used to calculate your monthly payment
• APR: a standardized rate that includes certain fees/points to reflect the loan's overall cost
• Discount points: optional upfront fees to lower the interest rate (1 point = 1% of loan amount)
• Lender credits: the lender covers part of closing costs in exchange for a higher rate

When buying points makes sense

• You plan to keep the mortgage long enough to pass the breakeven point
• The rate reduction per point is competitive (varies by market)
• You have cash for points without undermining emergency savings

Breakeven example

• Loan: $400,000, 30-year fixed
• 1 point costs $4,000 and reduces the rate by 0.25%
• Monthly savings ≈ $60–$75 depending on starting rate
• Breakeven ≈ 54–67 months (divide cost by monthly savings)

If you expect to refinance or sell earlier than the breakeven, buying points rarely pays.

How to evaluate offers with our tool

1. Open Mortgage Calculator
2. Compare scenarios with and without points/credits
3. Review total interest, payment, and cash-to-close

Step-by-step: choose points, credits, or par rate

1. Request three quotes for the same day: par (no points/credits), with points, with credits.
2. Calculate cash-to-close and monthly payment for each.
3. Compute breakeven months for the points option; estimate ownership/refi horizon.
4. Pick the option that minimizes total cost within your time horizon and cash constraints.

Worked scenario (illustrative)

• Par: 6.50%, $0 points, payment $2,528, cash-to-close $9,000
• Points: 6.125%, 1.0 point ($4,000), payment $2,432, cash-to-close $13,000 → save ~$96/mo → breakeven ~42 months
• Credit: 6.875%, -$3,000 credit, payment $2,594, cash-to-close $6,000 → higher payment but less cash upfront

If you plan to move in 24–36 months, par or credits often win. If staying 5–7+ years, points can be attractive.

Common pitfalls

• Comparing APRs across different fee structures or dates
• Underestimating the likelihood of near-term refinance or sale
• Draining emergency funds to buy points

Quick checklist

• Multiple same-day quotes saved
• Horizon and breakeven verified
• Cash reserves intact after closing

Myths vs reality

• “APR always tells the full story.” → Not always; APR excludes some costs and assumes you keep the loan to term.
• “Buying points is free money.” → No; it’s a trade of cash now for lower payments later—only good past breakeven.
• “Credits are bad.” → Credits can be optimal for short horizons or cash-constrained buyers.

Comparative table (illustrative)

Regional and lender nuances

• Some lenders price points non-linearly (first point cheaper/more effective than second). Compare marginal rate reduction per dollar.
• Credits can offset third-party fees (title, appraisal), but ask which line items they cover.
• Lock periods matter: longer locks may cost more; align lock length with closing timeline.

Advanced tips

• Calculate after-tax breakeven if you itemize deductions in early years, but be conservative—many households take the standard deduction.
• Avoid depleting emergency reserves for points; consider splitting cash between points and post-close reserves.
• Track the refi option value: in volatile rate environments, par pricing plus optional future refi may dominate buying points now.

Tips

• Compare APRs across lenders, but still read the fee breakdown
• Consider your time horizon; short-term owners often prefer credits over points
• Keep cash reserves; don't over-fund points at the expense of liquidity

APR calculation caveats (what APR hides)

• APR assumes you keep the loan for the full term. If you sell or refinance early, the APR comparison can mislead because upfront fees are amortized over fewer months.
• Some third-party fees are excluded from APR (jurisdiction-dependent). Two identical APRs can still require different cash-to-close.
• APR compresses different fee structures into one number. Always compare the full fee itemization and total cash-to-close alongside APR.

Mini example

• Loan A: 6.625% rate, 0 points, standard fees → APR 6.78%
• Loan B: 6.375% rate, 1 point, higher lender fees → APR 6.74%
• If you’ll keep the loan ~2–3 years, Loan A may cost less despite the higher APR because points don’t have time to pay back.

Payment vs cash-to-close trade-off (intuition)

Buying points moves cost from monthly to upfront. Credits do the reverse. If liquidity is scarce or job risk elevated, favor liquidity over small monthly savings. If tenure is long and reserves are strong, exchanging cash now for a lower rate often wins after breakeven.

Case studies

• First-time buyer, 3-year horizon: chooses small lender credit to preserve cash; plans to refi if rates fall.
• Move-up buyer, 8-year horizon: buys ~1.0 point with strong marginal reduction; clears breakeven in ~44 months.
• Cash-constrained buyer: selects par pricing, retains larger emergency fund; revisits points at future refi.

Horizon vs points decision matrix

• Horizon < 3 years: favor credits/par; avoid points.
• 3–6 years: buy points only if marginal rate cut per dollar is strong and cash remains ample.
• 7+ years: points often pay; still verify breakeven and after-tax impact.

FAQs

Is APR always comparable across lenders? No. APR formulas include certain fees but not all, and assumptions differ. Compare detailed fee sheets and total cash-to-close.

Do points affect escrow or PMI? No for escrow. Points can sometimes help push the rate low enough to change PMI thresholds, but PMI rules depend on LTV and program.

Can I finance points? Sometimes via higher loan amount or seller credits, but that changes APR and breakeven—model carefully.

Related links

• Refinance Break-Even
• Biweekly vs Monthly Mortgage
• Budget Calculator