Mortgage points, also called discount points, are an upfront fee you pay at closing in exchange for a lower interest rate. One point costs 1% of the loan amount, and whether it pays off comes down to one question: will you keep the loan long enough for the monthly savings to cover what you paid? Here is how to run that math, and how points fit with lender credits, seller concessions and your rate lock.
What Are Mortgage Points?
A discount point is a form of prepaid interest. You pay part of the cost of borrowing at closing, and in exchange the lender gives you a lower interest rate for the life of the loan.
One point equals 1% of the loan amount. On a hypothetical $400,000 loan, one point costs $4,000 and half a point costs $2,000. Points do not have to come in whole numbers; lenders often price in fractions of a point.
How much a point lowers your rate is not fixed. It varies by lender, by loan program and by the market on the day you lock. That is why comparing the actual cost of each option matters more than any rule of thumb you read online.
Origination charges vs. discount points
Not every charge that looks like a point lowers your rate. Some lenders charge an origination fee for making the loan, and that fee does not buy your rate down. Discount points are different: they are optional, and their only job is to reduce the rate.
On your Loan Estimate, both show up in Section A, “Origination Charges,” with discount points listed as a percentage of the loan amount. When you compare offers, look at the total of Section A alongside the rate, not the rate alone. The CFPB has a helpful explainer on how to use lender credits and points.
Lender Credits: Points in Reverse
A lender credit works the other way. You accept a slightly higher interest rate, and the lender gives you a credit toward your closing costs. You will sometimes hear this called negative points.
It helps to picture pricing as a menu for the same loan:
- Paying points: more cash at closing, lower monthly payment.
- No points and no credit: the middle of the menu.
- Taking a lender credit: less cash at closing, higher monthly payment.
Lender credits can make sense when cash is tight, when you would rather keep money in reserve after closing, or when you expect to sell or refinance within a few years. The trade-off is a higher payment for as long as you keep the loan.
Are Mortgage Points Worth It? The Break-Even Method
The cleanest way to decide is a simple break-even calculation:
Cost of the points ÷ monthly payment savings = months to break even
Here is a hypothetical example. The figures are for illustration only; they are not a quote and do not reflect current pricing. Say you are borrowing $400,000, and paying one point ($4,000) would lower your monthly principal and interest by about $60.
$4,000 ÷ $60 = about 67 months, or a little over five and a half years.
If you keep the loan longer than that, the points come out ahead, and every month after the break-even is money you keep. If you sell or refinance sooner, you paid more upfront than you saved.
The same math works in reverse for a lender credit. If a hypothetical $3,000 credit raised the payment by about $45 a month, it would take about 67 months for the higher payments to add up to the credit. Keep the loan longer than that, and the credit ends up costing you more than it saved.
Here is how a menu of options might look side by side for the same hypothetical $400,000 loan. Every figure is a hypothetical example, not a quote or current pricing.
| Option (hypothetical) | At closing | Monthly principal and interest | Break-even |
|---|---|---|---|
| Lender credit | $3,000 credit | About $45 higher | Costs more after about 67 months |
| No points, no credit | $0 | Baseline | Not applicable |
| One point | $4,000 cost | About $60 lower | About 67 months |
| Two points | $8,000 cost | About $110 lower | About 73 months |
In this example, the second point buys a smaller payment reduction than the first, which pushes the break-even further out. Pricing is not always linear, so it is worth seeing each option priced out instead of assuming more points always means more value.
One more thing the simple formula leaves out: the cash itself. Money spent on points is money that is not in your savings, your reserves or your down payment. A larger down payment, for example, can sometimes reduce or remove mortgage insurance, which may be worth more than a lower rate. A full comparison weighs those uses side by side, and it starts with knowing how much house you can afford with cash left over.
How long will you keep the loan?
This is the question that decides most points conversations, and it is not quite the same as how long you will live in the home. You might stay in the house for decades but refinance in a few years if rates drop, and a refinance ends the old loan along with whatever you paid in points.
Be honest about the likely timeline. A job change, a move across the Valley or a refinance to pull out equity can all end a loan sooner than planned.
Points tend to make more sense when:
- You expect to keep this loan well past the break-even point.
- You have cash left over after your down payment, closing costs and a healthy reserve.
- The break-even is reasonably short compared with how long you plan to keep the loan.
Points tend to make less sense when:
- Cash is tight, or paying points would drain your reserves.
- You might sell or refinance within a few years.
- The break-even stretches further out than you can comfortably predict.
Key takeaway: Points are a bet on time. Divide the cost by the monthly savings, and pay points only if you are confident you will keep the loan well past that break-even.
Can the Seller Pay for Your Points?
Often, yes. In a purchase, you can negotiate for the seller to contribute toward your closing costs, and those seller concessions can be used for discount points. In new-construction communities around Greater Phoenix, builders sometimes offer incentives through a preferred lender that can go toward closing costs or a lower rate.
Every loan program limits how much a seller can contribute, and the limits vary by program, down payment and occupancy. It is also worth asking how a concession is best used. The same dollars might buy the rate down, cover closing costs or reduce your cash to close, and the right choice depends on your timeline and your budget. When a builder incentive is tied to its preferred lender, compare the full package, not just the incentive.
Temporary buydowns
A temporary buydown is a different tool. Instead of lowering the rate for the life of the loan, it uses funds paid upfront (often by a seller or builder) to reduce the payment for the first year or two. After that, the payment steps up to the full amount on the note. It can ease the early years of owning a home, but you should be comfortable with the full payment from day one, and lenders generally qualify you based on it.
How Points Relate to Your Rate Lock
Rates and pricing can move daily, sometimes more than once a day. Until your rate is locked, any quote for points is an estimate, and the cost of a given rate can change.
When you lock, you lock both a rate and the price of that rate, meaning the points you pay or the credit you receive. A few practical notes:
- Decide on points before you lock if you can. Changing your pricing after locking may require a relock or lender approval, and policies vary.
- Longer locks can cost more. A longer lock period may add to the price, which can show up as additional points.
- Watch your closing timeline. If closing slips past your lock expiration, an extension may cost extra, and relocking could mean different pricing.
For a closer look at rate locks and how rates translate into payments, see how interest rates affect your payment.
Should You Pay Points on a Refinance?
The same break-even math applies when you refinance, but timing matters even more. Paying points on a refinance makes sense only if you expect to keep the new loan long enough to recover both the points and the other closing costs. If there is a reasonable chance you will refinance again, points are harder to justify. I walk through the full refinance math in when refinancing makes sense.
Are Mortgage Points Tax Deductible?
Points can be deductible in some situations, but the rules depend on the type of loan, whether it is a purchase or a refinance, how the points are paid and whether you itemize. I am not a tax advisor, and nothing here is tax advice. If a deduction is part of your decision, check with a tax professional before you count on it.
How I Help You Compare Points and Credits
Because I am not tied to one bank and compare programs across a network of lenders, I can show you the same loan priced several ways: with points, with no points and with a lender credit. For each one, you see the cash needed at closing, the monthly payment and the break-even in months, so the trade-off is clear before you lock.
I will also ask the questions that decide the answer: how long you expect to keep the loan, how much cash you want left in reserve and whether a seller or builder is contributing. Whether you are financing a purchase with a conventional loan or refinancing a loan you already have, the goal is the structure that fits your plans, not the most impressive-looking rate on paper.
When you are ready, get pre-qualified and I will walk you through your options side by side.
