A mortgage point, or discount point, is an upfront fee you pay the lender to lower your interest rate. One point costs 1% of the loan amount. On a $320,000 loan, one point is $3,200. How much it lowers the rate is set by the lender and changes with the market, so you have to ask for quotes and do the math.
Points pay off only if you keep the loan long enough for the monthly savings to cover the upfront cost.
Finding your break-even month
Break-even (months) = cost of points ÷ monthly payment savings
Example on a $320,000, 30-year fixed loan, principal and interest only:
| Option | Points paid | Rate | Monthly payment | Monthly savings | Break-even |
|---|---|---|---|---|---|
| No points | $0 | 6.50% | $2,023 | — | — |
| 1 point | $3,200 | 6.25% | $1,970 | $52 | 61 months (about 5 years) |
| 2 points | $6,400 | 6.00% | $1,919 | $104 | 62 months (about 5 years) |
In this example, if you keep the loan for more than about five years, points save money. If you sell or refinance before then, you lose part of what you paid.
The rate cut per point in this table, 0.25%, is a common rule of thumb, not a standard. Some lenders give less. Always run the numbers on the actual quotes.
When points make sense
- You plan to stay put. Points work best for a home you expect to keep for many years, with a loan you don't expect to refinance.
- You have cash to spare after closing. Paying points shouldn't drain the reserves you need for repairs or emergencies.
- Rates are unlikely to fall much. If rates drop and you refinance in two years, the points you paid are mostly lost.
When to skip them
- You might move within five years.
- Rates are high and you expect to refinance when they come down.
- Paying points would mean a smaller down payment that pushes you into mortgage insurance. PMI often costs more than the points save.
- You'd be using cash you'd otherwise keep as an emergency fund.
Points vs. a bigger down payment
The same $3,200 could go toward your down payment instead. On a $320,000 loan at 6.50%, cutting the balance by $3,200 lowers the payment by about $20 a month. In this example, points save more per dollar than extra down payment. That isn't always the case, and an extra down payment can matter more if it gets you to 20% and removes PMI.
Negative points and lender credits
It works in reverse too. A lender can offer a credit toward your closing costs in exchange for a higher rate. This can make sense if you're short on cash at closing or expect to sell or refinance soon. Over a long hold, the higher rate costs more.
How points appear on your Loan Estimate
Points are listed on page 2 of the Loan Estimate, under Section A, Origination Charges, as a percentage of the loan amount and a dollar figure. Lenders also show points on page 1 in the summary of closing costs.
To compare lenders fairly, ask each for two quotes on the same day: one with zero points and one with one point. Rates change daily, so quotes from different days aren't comparable.
Are points tax deductible?
Points paid on a loan to buy your main home may be deductible in the year you pay them, if you itemize and meet the IRS conditions. Points on a refinance are generally deducted over the life of the loan. See IRS Publication 936 or ask a tax professional.