Discount points are prepaid interest. You hand the lender money at closing in exchange for a permanently lower rate, and the question is always the same: will you keep the loan long enough for the monthly saving to repay the upfront cost?
What a point costs and buys
One point costs 1% of the loan amount — $4,000 on a $400,000 mortgage. The rate reduction it buys is set by the lender and varies with market conditions; a quarter-point per point is a common rule of thumb, but the real schedule is often less generous.
Always ask for the actual buy-down schedule rather than assuming. Lenders frequently price the first point better than the third, so buying more is not proportionally better.
Break-even months = cost of points ÷ monthly payment saving
Break-even is the whole decision
Two points on a $400,000 loan cost $8,000 and might save around $132 a month. That is roughly 61 months — just over five years — to recover the outlay.
Keep the loan longer and everything after break-even is profit. Sell or refinance sooner and you have simply lost the difference.
The median US homeowner moves or refinances well before the thirty-year term. Judge points against how long you will actually keep this specific loan, not against the term written on it.
Discount points versus origination fees
Both appear as percentages of the loan on your Loan Estimate, which makes them easy to confuse. Only discount points do anything for your rate.
| Discount points | Origination points | |
|---|---|---|
| Purpose | Buys a lower rate | Pays the lender for making the loan |
| Optional | Yes | Usually not |
| Reduces your rate | Yes | No |
| Often tax-deductible | Generally yes | Generally no |
When points are worth buying
The reverse also holds. If rates are high and expected to fall, points are usually a poor bet: refinancing at a lower rate would discard the benefit you paid for.
- You are confident you will stay well past the break-even point.
- You have cash beyond the down payment, reserves and closing costs — points should never come out of your emergency fund.
- Rates are low and unlikely to fall further, reducing the chance you refinance away from the loan.
- You need a lower payment to satisfy a debt-to-income requirement.
Negative points
The trade runs both ways. Lender credits, sometimes called negative points, give you cash toward closing costs in exchange for a higher rate.
That can be sensible when you are short of closing funds or expect to refinance soon — you are effectively borrowing the closing costs at the loan's rate.
Worked example
Using the values pre-loaded in the calculator above:
| Input | Value |
|---|---|
| Loan amount ($) | 400000 |
| Rate without points (%) | 6.75 |
| Points purchased (pts) | 2 |
| Rate cut per point (%) | 0.25 |
| Term (yrs) | 30 |
| Years you expect to keep the loan (yrs) | 7 |
| Marginal tax rate (points may be deductible) (%) | 0 |
| Output | Value |
|---|---|
| Break-even | 60.8 months |
| Cost of 2 points | $8,000.00 |
| After tax deduction | $8,000.00 |
| Rate without points | 6.75% |
| Rate with points | 6.25% |
| Payment without points | $2,594.39 |
| Payment with points | $2,462.87 |
| Monthly saving | $131.52 |
Frequently asked questions
How much does one mortgage point cost?
One point equals 1% of the loan amount — $4,000 on a $400,000 loan. It typically reduces the rate by around 0.25%, though the exact amount varies by lender.
Are mortgage points worth it?
Only if you keep the loan past the break-even point, which is the cost of the points divided by the monthly saving. Typical break-evens run five to seven years.
Are mortgage points tax deductible?
Discount points on a primary residence purchase are generally deductible in the year paid in the US, subject to conditions. On a refinance they usually must be spread across the loan term. Confirm with a tax professional.
Can I negotiate points?
Yes. The buy-down schedule varies between lenders, so compare the rate each offers at the same point cost rather than comparing headline rates alone.
What is the difference between discount and origination points?
Discount points buy down your rate. Origination points are a fee for making the loan and do not lower your rate at all.