Understanding rate tables
Rate tables show the relationship between points (cost) and interest rates. Here’s how to read one:Example rate table
For a $400,000 loan, here’s a typical rate table:| Points | Rate | Upfront Cost | Monthly Payment (P&I) |
|---|---|---|---|
| -1.0 | 7.25% | -$4,000 (credit) | $2,730 |
| -0.5 | 7.125% | -$2,000 (credit) | $2,695 |
| 0.0 | 7.0% | $0 | $2,661 |
| 0.5 | 6.875% | $2,000 | $2,628 |
| 1.0 | 6.75% | $4,000 | $2,595 |
| 1.5 | 6.625% | $6,000 | $2,562 |
| 2.0 | 6.5% | $8,000 | $2,530 |
How to read this table
Moving from 0.0 to 0.5 points:- Cost increase: +$2,000 (0.5 points = 0.5% of $400,000)
- Rate improvement: -0.125% (from 7.0% to 6.875%)
- Monthly savings: $33 per month
- Break-even: ~61 months (5 years)
- Cost increase: +$2,000 (another 0.5 points)
- Rate improvement: -0.125% (from 6.875% to 6.75%)
- Monthly savings: $33 per month
- Break-even: ~61 months (5 years)
Negative points (rebates)
Negative points work in reverse-you accept a higher rate in exchange for lender credits: Moving from 0.0 to -0.5 points:- Cost decrease: -$2,000 (you receive a credit)
- Rate increase: +0.125% (from 7.0% to 7.125%)
- Monthly cost increase: $34 per month
Discount points
Discount points (commonly called “points”) are upfront fees paid at closing to permanently reduce the interest rate for the life of the loan. One point equals 1% of the loan amount. When borrowers pay discount points, they’re essentially prepaying interest to secure a lower ongoing rate. This can be advantageous for borrowers who plan to keep the loan for an extended period, as the upfront cost is amortized over many years of lower monthly payments. The decision to pay points depends on the borrower’s cash position, expected loan duration, and opportunity cost of using that cash for other purposes.Interest rate
The interest rate (also called the note rate) is the annual percentage rate charged on the outstanding loan principal. It directly determines the monthly principal and interest payment amount and represents the cost of borrowing money. The interest rate is fixed for the loan term in fixed-rate mortgages, while adjustable-rate mortgages have an initial fixed period followed by periodic adjustments. The interest rate is the most visible component of loan cost for borrowers because it directly impacts monthly cash flow. However, the true cost of borrowing must consider both the interest rate and any upfront points or fees, which is why APR (Annual Percentage Rate) provides a more comprehensive cost comparison.Points vs. rate trade-off
Borrowers face a fundamental trade-off between upfront costs and ongoing costs. A higher rate with lower or no points minimizes upfront cash requirements, making it easier for borrowers with limited cash reserves or those who prefer to preserve liquidity. This structure results in higher monthly payments but requires less cash at closing. Conversely, a lower rate with higher points requires more upfront cash but reduces monthly payments. This structure is optimal for borrowers with available cash who plan to keep the loan long enough to recoup the upfront investment through lower monthly payments. The optimal choice depends on the borrower’s cash position, expected loan duration, alternative uses for cash, and personal financial preferences.Break-even analysis
Determining whether paying points makes financial sense requires calculating the break-even point, which is the number of months it takes for the cumulative monthly payment savings to equal the upfront points cost. The break-even calculation is:Related concepts
- Annual Percentage Rate (APR) - Total cost including points
- Loan-Level Price Adjustments (LLPA) - How points affect pricing
- Pricing optimizations - How Pylon optimizes points and rates