In plain terms, points (also called mortgage points or discount points) are prepaid interest you can pay at closing to lower the interest rate on your mortgage. One point = 1% of the loan amount. So on a $300,000 loan, one point costs $3,000.
Featured-snippet: Points are prepaid interest—1 point = 1% of the loan—and buying 1 point typically reduces the mortgage rate by 0.125%–0.25%. Example: 1 point on a $200,000 loan costs $2,000 and might cut the rate from 4.5% to ~4.25%.
Discount points (the common meaning of “points”) are paid to reduce your interest rate. Origination points (or origination fees) are charged by the lender to cover underwriting and loan processing; they may not buy down the rate. Both may appear as “points” on loan paperwork, so confirm the type with your lender.
Points are disclosed on the Loan Estimate and Closing Disclosure under lender fees or prepaid items. They may also appear as “Discount Points” or “Loan Origination” on settlement statements. Always review line items and ask the lender to label which points lower your rate.
There’s no universal formula, but a common rule-of-thumb is 1 discount point reduces a mortgage rate by roughly 0.125%–0.25% (12.5–25 basis points). The actual reduction varies by lender, loan program, current market, and loan amount. Lenders publish rate/point grids showing exact tradeoffs.
Illustrative numbers (30-year fixed, market-dependent):
These are examples—actual rate cuts can be smaller or larger. Always get a written quote showing rate vs points.
Paying points lowers your contract interest rate, which reduces your monthly payment. APR (annual percentage rate) converts upfront charges and interest into a single annualized cost—so buying points raises upfront costs and can increase APR even if the nominal rate is lower. APR is useful for apples-to-apples lender comparison but may mislead when comparing long-term value (break-even depends on time in the loan).
Cost of points = loan amount × 1% × number of points. Example: loan $250,000 × 1% = $2,500 per point.
Lenders allow fractional points (e.g., 0.25 or 0.5 point). You can buy multiple points (1.5, 2.0) if the lender’s pricing supports it. Fractional points are priced proportionally—0.5 point = 0.5% of the loan amount.
Points can sometimes be financed into the loan balance (increasing principal) but that defeats much of the benefit because you pay interest on the financed points. Sellers can pay points as a concession—commonly in purchase deals sellers pay “up to X% in closing costs,” which can include points. Check program limits (see FHA/VA rules below).
Basic break-even in months = Cost of points ÷ Monthly payment savings.
Scenario: $300,000 loan, 30-year fixed.
If you plan to stay longer than 64 months, the points start saving you money after that point; if you sell or refinance sooner, you lose money on the upfront cost.
Small changes in expected time in the home or interest-rate movements change the decision. If you expect to refinance within a few years, points are rarely worth it. If rates fall and you refinance, points you paid may never be recouped—unless you amortize them across the refinance under certain tax rules (see tax section).
Pros: lower monthly payment and interest over time; may help qualify for loan. Cons: large upfront cash needed at closing, which may strain down payment or reserves. First-time buyers with limited cash generally avoid points unless they have excess funds and plan to stay long-term.
Refinancers should buy points only if they’ll keep the new loan long enough to hit the break-even and if the refinance transaction otherwise makes sense (closing costs vs interest savings). For cash-out refis or short-term horizons, skip points.
Investors should treat points as an investment: calculate ROI vs using that cash for other investments or for down payment. For short-term rentals or flips, points rarely make sense. For buy-and-hold rentals with stable cash flows, buying points can improve long-term ROI if holding period exceeds break-even.
If you expect to move, sell, or refinance within the break-even period, don’t buy points. Keep cash flexible for transaction costs and unexpected repairs instead.
Conventional loans commonly allow discount points; lenders publish rate/point grids. Sellers can usually pay buyer points as concessions within seller contribution limits tied to down payment percentage.
These programs have specific rules: buyers can pay discount points, and sellers often can pay them too, but there are limits on seller concessions and what counts as allowable seller-paid closing costs. VA loans allow seller-paid points but restrict borrower-paid fees for certain funding fees—review the program’s guidelines. Always confirm with the specific program and lender.
Jumbo and portfolio lenders set their own pricing and may offer different point-to-rate tradeoffs. Because jumbo loans aren’t sold to Fannie/Freddie, lenders have more flexibility—and pricing can be less standardized. Expect wider variation in how many basis points each discount point buys.
For purchase mortgages on a primary residence, discount points are often deductible in the year paid if they meet IRS rules (e.g., points are customary in your area, the loan is secured by your main home, amounts are clearly shown on the settlement statement). For refinances, points generally must be amortized (deducted over the life of the loan) instead of deducted in full the year paid.
Are mortgage points tax deductible? Often yes for purchase loans that meet IRS conditions, but consult a tax advisor.
When refinancing, points are typically deductible pro rata over the life of the new loan (e.g., $3,000 paid on a 15-year refi → $3,000/180 months deducted monthly). For rental properties, points must generally be amortized over the rental period and deducted as an expense per IRS rules.
Keep the Closing Disclosure/HUD-1, loan documents showing points paid, settlement statements, and proof of primary residence/use. Your tax preparer will need these to support any deduction claims.
Yes. Points can be negotiated as part of the purchase offer (seller-paid points) or with the lender (rate/point pricing). Lenders also offer lender credits—higher rate in exchange for credits to offset closing costs. Compare both options.
Don’t confuse discount points with origination fees or prepaids (escrows for taxes/insurance). Ask the lender to itemize: “How much of this fee is a rate buy-down (discount points) vs a true origination fee?” Origination fees don’t lower the rate.
Normalize by calculating break-even and total interest cost over your expected holding period. Use monthly payment savings and break-even months to compare offers rather than only looking at the nominal rate.
APR incorporates upfront costs and interest into a single number—helpful for comparing loans with similar terms. But APR assumes you keep the loan for the full term; it can penalize options that make sense if you plan to keep the loan long-term and buy points. Use both APR and break-even math.
Be realistic: planned time in home, job mobility, market conditions, refinance likelihood.
Use the break-even formula (cost ÷ monthly savings) and compute total interest saved over expected holding period.
Check multiple scenarios (stay 3 yrs / 5 yrs / 10 yrs) and request written rate/point grids from several lenders.
Negotiate seller credits, ask lenders to clarify “discount points” vs other fees, and verify the Closing Disclosure shows points as intended.
Maria is a first-time buyer buying a $350,000 home with a $280,000 mortgage (20% down). Lender offers:
Monthly savings = $46. Break-even = $2,800 ÷ $46 ≈ 61 months (≈5.1 years). Maria plans to stay 7+ years and has extra closing-cash after reserves, so buying 1 point makes sense: she'll recoup the cost after ~5.1 years and save money thereafter. If Maria expected to move in 2–3 years, she should skip buying points.
Formula: Break-even months = (Loan amount × %points) ÷ (Monthly payment at no points − Monthly payment with points)
Inputs you need: loan amount, rate w/0 points, rate w/points, loan term (months).
Loan Costs
Origination Charges:
- Origination (0.5 points) ........ $1,400
- Discount Points (1.0 point) ..... $2,800
Other Costs
Prepaids:
- Mortgage Interest (per diem) .... $XX.XX
Note: Labels vary. Ensure “Discount Points” or “Loan Discount” explicitly indicates rate buy-down.
"Please provide written rate sheets showing rates at 0.0, 0.5, and 1.0 discount points for a $___ loan on a 30-year fixed. Please itemize which fees are discount points vs origination. Are seller-paid points allowed? If I pay X points, what is the APR and monthly payment?"
Discount points buy down the interest rate. Origination points are lender fees for processing the loan and typically don’t lower the rate.
Points are not refunded if you sell; for refinances you may be able to deduct remaining unamortized points for tax purposes, but you don’t get a cash refund.
No—pricing, how much rate reduction each point buys, and whether points are called “points” or “fees” vary. Always get written quotes.
There’s no set number. Buy points only if the break-even period matches or is shorter than your expected time in the loan and you have the cash to pay upfront.
Not always. Buying points lowers the nominal rate but increases upfront costs, which can increase APR. Use APR and break-even math together for decisions.
Points are prepaid interest (1 point = 1% of loan) used to lower your mortgage rate. Buy points if you have extra cash, plan to keep the loan beyond the break-even period, and want lower monthly payments; avoid points if you’ll move or refinance soon or need cash for closing. Always get written rate/point quotes and run the break-even math before deciding.
Bring your target loan amount, planned holding period, and a checklist of questions (rate at 0/0.5/1 point, cost per point in dollars, whether points are discount or origination, seller-paid options). Compare offers using break-even months and total expected interest saved. And consult a tax pro about deductibility—see related topics: mortgage basics, closing costs explained, refinance guide, tax-deductible mortgage interest.
