Mortgage Points Explained: Are They Worth Buying?
Mortgage points let you pay more upfront in exchange for a lower interest rate. Here's how discount points work, how to work out your break-even point, when buying points makes sense, how lender credits work in reverse and how points are treated for taxes.
By Pond.com editors Updated 3 min read
Quick answer
- One point costs 1% of the loan amount, paid at closing.
- Each point often lowers the rate by around a quarter of a percentage point, but it varies by lender.
- Divide the cost of the points by the monthly saving to find how many months it takes to break even.
- Points usually make sense only if you'll keep the loan well past the break-even point.
- Lender credits work the other way: a higher rate in exchange for lower closing costs.
When you compare mortgage offers, you'll often see the same loan at several rates, each with a different upfront cost. The difference is usually points. Buying them can save money, but only if you keep the loan long enough.
This article is general information, not financial or tax advice.
How points work
Discount points are prepaid interest. You pay them at closing, and in return the lender lowers your rate.
- One point = 1% of the loan. On a $360,000 loan, one point costs $3,600.
- Each point often lowers the rate by about 0.25 percentage point, but lenders price them differently, so compare the actual quotes.
Work out the break-even point
Cost of the points ÷ monthly saving = months to break even
Example: on a $360,000, 30-year loan, one point ($3,600) lowers the rate from 7.32% to 7.07%:
- Payment without points: about $2,473 a month.
- Payment with one point: about $2,412 a month.
- Saving: about $61 a month.
- Break-even: $3,600 ÷ $61 = about 59 months, or just under five years.
If you keep the loan longer than that, the points save you money. If you sell or refinance sooner, you lose money on them.
When points make sense
| Points may be worth it if | Skip them if |
|---|---|
| You plan to stay in the home for many years | You might move or refinance within a few years |
| You have cash left after your down payment, closing costs and an emergency fund | Paying them would drain your savings |
| Rates seem unlikely to fall much soon | Rates look likely to drop, making a refinance likely |
| The rate cut per point is generous | The lender offers only a small rate cut per point |
A bigger down payment, paying off debt or keeping an emergency fund can be better uses of the same money. See how to build an emergency fund.
Lender credits: points in reverse
You can also take a higher rate in exchange for lender credits that pay part of your closing costs. That can make sense if you're short of cash or expect to sell or refinance within a few years. See closing costs explained.
Taxes
Points paid to buy your main home can often be deducted in the year you pay them, if you itemize and meet IRS conditions. Points on a refinance are usually spread over the life of the loan. Most people take the standard deduction, so check whether it applies to you.
Common questions
Often. Points paid to buy your main home can usually be deducted in the year you pay them if you itemize and meet the IRS conditions. Points on a refinance are usually deducted gradually over the life of the loan. Check IRS rules or ask a tax preparer.
Yes. Lenders often price points in fractions, such as 0.5 or 0.25 of a point. Your Loan Estimate shows the exact cost in dollars and as a percentage of the loan.
No. Discount points buy a lower rate. Origination points are a lender fee for making the loan and don't lower your rate. Both appear in Section A of the Loan Estimate, so check which is which.