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Mortgage Points (Discount Points)
Mortgage points are upfront fees paid to the lender at closing to reduce your interest rate. One point costs 1% of the loan amount and typically lowers the rate by 0.25%.
How It Works
Mortgage discount points are a form of prepaid interest. You pay a lump sum at closing in exchange for a lower interest rate for the life of the loan. One point equals 1% of the loan amount. On a $360,000 loan, one point costs $3,600. Each point typically reduces your rate by 0.25%, though this varies by lender and market conditions. The decision to buy points depends on your break-even timeline — how long it takes for the monthly savings to exceed the upfront cost. If one point saves you $55/month, the break-even is $3,600 ÷ $55 = 65 months (about 5.4 years). Points are generally tax-deductible in the year of purchase for a home buy, or amortized over the loan term for a refinance. Negative points (lender credits) work in reverse — you accept a higher rate in exchange for the lender covering some closing costs.
Key Facts
One point = 1% of the loan amount
Typically reduces rate by 0.25% per point
Break-even is usually 4-7 years
Tax-deductible for home purchases (in the year paid)
Lender credits (negative points) = higher rate, lower closing costs
Best for borrowers who plan to keep the loan long-term
Example
Loan: $360,000. Rate without points: 6.75%. One point ($3,600) lowers rate to 6.5%. Monthly savings: $58. Break-even: $3,600 ÷ $58 = 62 months (5.2 years). If you keep the loan 30 years, you save $17,280 after the cost of the point.
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Frequently Asked Questions
Points are worth it if you plan to keep the loan past the break-even point (typically 4-7 years). If you might sell or refinance sooner, skip the points or consider lender credits instead.
Most lenders allow up to 3-4 points, though buying more than 2 points usually has diminishing returns. Each additional point reduces the rate by a smaller amount.