A zero point loan is a mortgage option in which the borrower bypasses paying discount points—one percent of the loan amount paid upfront to reduce the interest rate—at closing. Instead, the borrower accepts a slightly higher interest rate on the loan. This choice lowers the initial cash needed at closing but typically means higher monthly mortgage payments and more paid interest over the life of the loan.
In mortgage finance, “points” refer to fees paid to lenders to “buy down” or decrease the interest rate. One point equals 1% of the loan amount. For example, on a $300,000 mortgage, one point costs $3,000. Paying points lowers the loan’s interest rate, reducing monthly payments. Conversely, a zero point loan avoids these upfront fees but charges a higher interest rate.
There are two types of points commonly referenced:
- Discount points: Paid voluntarily by borrowers to lower the interest rate.
- Origination points/fees: Charged by lenders as processing fees, not reducing the rate.
Zero point loans specifically avoid paying discount points.
Choosing a zero point loan means you save money upfront since you don’t pay discount points at closing, but you accept a higher interest rate from the lender. This results in higher monthly payments and a greater total interest cost over time. Lenders receive compensation through a higher interest rate as opposed to upfront fees.
For example, on a 30-year, $300,000 fixed-rate mortgage, a zero point loan might have an interest rate of 7.00% with no upfront points, while paying 1 point ($3,000) could reduce the rate to 6.75%. The monthly payment difference might be around $48, and it usually takes over five years to recoup the upfront point cost through these monthly savings.
Zero point loans are beneficial for:
- Buyers who need to minimize upfront costs, such as first-time homebuyers.
- Homeowners who plan to sell or refinance before reaching the breakeven point where points pay off.
- Borrowers preferring to maintain cash on hand for other financial priorities.
When considering a zero point loan, calculate the breakeven point (cost of points divided by monthly payment savings) to determine if paying points makes sense for your timeline. Always compare the Annual Percentage Rate (APR) too, as it reflects total loan costs including fees. Remember, zero points do not eliminate other closing costs like appraisal or title fees.
It’s a good idea to shop around and request rate quotes both with and without points from multiple lenders. Also, understand that origination fees are separate and may still apply.
For more details on mortgage points and fees, see our comprehensive guide on Mortgage Points and on managing Mortgage Closing Costs.
Further guidance is available from the Consumer Financial Protection Bureau to help you make informed mortgage decisions.
