Discount points are an upfront fee you can pay at closing to permanently lower your mortgage interest rate. One point equals 1% of the loan amount, and buying points is essentially prepaying interest in exchange for a smaller payment every month. Whether points are worth it comes down to how long you keep the loan.
What a point buys you
Paying one discount point costs 1% of your loan amount and typically reduces your rate by roughly 0.25 percentage points, though the exact amount varies by lender and market. Because the rate reduction is permanent for the life of the loan, points lower every future monthly payment. This differs from an origination point, which is a fee for processing the loan and does not lower your rate. Always confirm on the Loan Estimate whether a point is a discount point or a fee.
Calculating the break-even
The key number is the break-even point: divide the upfront cost of the points by the monthly payment savings to find how many months it takes to recover the cost. If points cost $4,000 and save $60 a month, you break even at about 67 months, or roughly five and a half years. Keep the loan longer than the break-even and the points save money; sell or refinance sooner and you lose. This simple ratio is more reliable than any rule of thumb.
When points make sense
Buying points tends to pay off when you plan to stay in the home and keep the same loan well beyond the break-even period. It also helps borrowers who want the lowest possible long-term payment and have cash to spare after covering the down payment and reserves. Points are less attractive if you might move, refinance, or pay the loan off early, since you would not hold it long enough to recoup the cost. In a falling-rate environment, paying to lock a rate you may soon refinance away is risky.
Points, taxes, and negotiation
Because discount points are prepaid mortgage interest, they may be tax-deductible in the year paid on a home purchase if you itemize, subject to IRS rules; on a refinance they are generally deducted over the life of the loan. Points are also negotiable, and sometimes a seller or builder will offer credits that effectively buy down your rate. You can request rate-and-point scenarios from each lender to compare the same loan at different upfront costs. The reverse also exists: lender credits raise your rate slightly in exchange for cash toward closing costs.
On a $400,000 loan, two discount points cost $8,000 and drop the rate from 7.0% to 6.5%, cutting the payment from about $2,661 to $2,528, a savings of $133 a month. Dividing $8,000 by $133 gives a break-even near 60 months. Stay past five years and the points pay off; leave sooner and you lose money on the upfront cost.
Key takeaways
- One discount point costs 1% of the loan and lowers your rate, often by about 0.25 points.
- The break-even equals point cost divided by monthly savings, in months.
- Points reward borrowers who keep the loan well past the break-even period.
- Discount points differ from origination points, which are a fee and do not cut your rate.
- Lender credits are the mirror image: a higher rate in exchange for cash toward closing.
Common mistakes
- Buying points without calculating the break-even and how long you actually plan to stay.
- Confusing discount points that lower your rate with origination points that are just a fee.
- Paying points while planning to refinance soon, giving up the upfront cash before it pays back.
FAQ
Can I buy a fraction of a point?
Yes. Lenders often let you buy partial points, such as half a point for 0.5% of the loan, with a proportional rate reduction. Ask for several rate-and-point combinations to compare.
Are points always worth it if I can afford them?
No. Points only pay off if you keep the loan past the break-even period, so the decision depends on your timeline, not just whether you have the cash.