Mortgage Points
Quick Definition
Mortgage points, also called discount points, are an upfront fee paid to a lender at closing in exchange for a lower interest rate on the loan. One point equals 1% of the loan amount. Paying points is prepaying mortgage interest: you pay more now to pay less each month. Whether points make financial sense depends entirely on how long you stay in the home and how long it takes to recoup the upfront cost through monthly savings.
What It Means
Points are a lever for trading upfront cash for a lower rate. If you have the cash, plan to stay in the home long-term, and can lock in a meaningful rate reduction, paying points can save tens of thousands of dollars over the life of the loan. For buyers who plan to sell or refinance within 5 years, points rarely pay off. The monthly savings do not accumulate enough to offset the upfront cost.
In July 2026, 30-year fixed mortgage rates averaged 6.54%, according to Freddie Mac. The National Association of Realtors reported the median existing-home price at $434,100. For a buyer putting 20% down on a median-priced home, the loan amount would be about $347,000. At that loan size, one point costs $3,470 and typically reduces the rate by 0.25 percentage points, saving about $58 per month.
The Consumer Financial Protection Bureau (CFPB) notes that one point equals 1% of the loan amount and that points do not have to be round numbers. You can pay 0.5 points, 1.25 points, or 2 points. Each fraction of a point has a corresponding rate reduction, though the exact relationship varies by lender and market conditions. Points are listed on page 2, Section A of your Loan Estimate and Closing Disclosure, and by law they must be connected to a discounted interest rate.
How It Works
The Math of Points
One point costs 1% of the loan amount. The rate reduction per point is typically 0.25 percentage points, but this varies. Some lenders offer more aggressive buydowns; others less. The relationship is not perfectly linear: the second point may reduce the rate less than the first.
Example: On a $350,000 loan at 6.5% with no points, the monthly principal and interest payment is $2,212. Paying one point ($3,500) to reduce the rate to 6.25% drops the payment to $2,158, saving $54 per month.
Break-even calculation: $3,500 / $54 = 65 months, or about 5.4 years. If you stay in the home (and keep the loan) longer than 65 months, you come out ahead. If you sell or refinance before then, you lose money on the points.
Types of Points
| Type | Description | Tax Treatment |
|---|---|---|
| Discount points | Paid to reduce the interest rate ("buying down the rate") | Deductible as mortgage interest if IRS criteria are met |
| Origination points | Lender's fee for processing the loan, not a rate reduction | Not deductible as interest; may be part of closing costs |
| Negative points (lender credits) | Lender pays you at closing in exchange for accepting a higher rate | Reduces your upfront cost but increases monthly payment |
Negative points, or lender credits, work in reverse. Instead of you paying the lender for a lower rate, the lender pays you for accepting a higher rate. This makes sense for buyers who are cash-constrained at closing or who plan to sell or refinance quickly. The CFPB explains that lender credits lower your closing costs in exchange for a higher interest rate, the mirror image of paying points.
The Break-Even Decision
The break-even point is the key metric. To calculate it:
- Find the monthly savings from the lower rate (payment at no points minus payment with points)
- Divide the cost of the points by the monthly savings
- Compare the result to how long you expect to keep the loan
If break-even is 65 months and you plan to stay 10 years (120 months), you save money for 55 months after break-even. If you plan to move in 3 years (36 months), you never reach break-even and points are a waste.
Tax Treatment
The IRS allows deduction of discount points as mortgage interest if certain tests are met. According to IRS Topic 504, points paid to obtain a mortgage on your principal residence may be fully deductible in the year you pay them if:
- The points are a customary practice in your area
- The points are computed as a percentage of the loan principal
- The points are clearly shown as points on your settlement statement
- The funds you bring to closing (down payment, escrow, etc.) are at least equal to the points charged
- The loan is used to buy or build your primary residence
If you do not meet all tests, points are deducted ratably (spread equally) over the life of the loan. Points paid on a refinance are generally deducted over the loan term, not all in year one. Points paid by the seller on your behalf are treated as paid by you (and reduce your basis in the home), but the seller cannot deduct them.
Real-World Examples
Example 1: Points That Pay Off
A buyer takes out a $400,000 30-year fixed mortgage. The lender offers 6.5% with zero points or 6.0% with two points.
| Option | Rate | Points Cost | Monthly P&I | Monthly Savings |
|---|---|---|---|---|
| Zero points | 6.5% | $0 | $2,528 | - |
| Two points | 6.0% | $8,000 | $2,398 | $130 |
Break-even: $8,000 / $130 = 62 months (5.2 years)
If the buyer stays in the home for 15 years (180 months), they save $130 x 180 = $23,400 in monthly payments, minus the $8,000 upfront cost, for a net savings of $15,400. They also save on total interest over the life of the loan: the 6.0% loan accrues about $463,000 in interest over 30 years, while the 6.5% loan accrues about $509,000, a difference of $46,000.
Example 2: Points That Do Not Pay Off
A buyer plans to relocate in 3 years for a job. They are offered the same $400,000 loan at 6.5% with zero points or 6.0% with two points ($8,000). Break-even is 62 months. They sell after 36 months.
Total savings over 36 months: $130 x 36 = $4,680. Cost of points: $8,000. Net loss: $3,320. Points were a bad choice. This buyer should have taken the zero-point option or even accepted lender credits (negative points) to reduce closing costs.
Example 3: Lender Credits for a Cash-Strapped Buyer
A buyer is short on cash at closing. The lender offers 6.5% with zero points and $0 credits, or 6.75% with a $4,000 lender credit (negative points). The higher rate adds $66 to the monthly payment, but the $4,000 credit covers closing costs the buyer cannot afford out of pocket.
Break-even on the credit: $4,000 / $66 = 61 months. If the buyer refinances or sells before 61 months, the lender credit was a good deal (they effectively borrowed $4,000 at a cost of $66/month). If they stay longer, the higher rate costs more than the credit was worth.
Key Points to Remember
- One point equals 1% of the loan amount and typically reduces the rate by 0.25 percentage points.
- Break-even is the cost of points divided by monthly savings. Compare it to how long you expect to keep the loan.
- Points favor long-term holders. If you plan to sell or refinance within 5 years, skip them or take lender credits instead.
- Discount points may be deductible as mortgage interest in the year paid if IRS criteria are met. Origination points are not.
- Lender credits (negative points) trade a higher rate for lower upfront costs, useful for cash-constrained buyers.
- Points are listed on your Loan Estimate and Closing Disclosure, and by law must be tied to a rate discount.
- In July 2026, 30-year fixed rates averaged 6.54%. Buying points at this rate level carries refinance risk if rates fall.
Common Mistakes to Avoid
- Buying points when you plan to move soon: The most common mistake. If you sell or refinance before break-even, you lose money. Be honest about your timeline.
- Ignoring refinance risk: If rates fall after you buy points, you may refinance to capture the lower rate, wiping out the value of the points you paid. In 2026, with rates around 6.5% and forecasts suggesting possible declines, this risk is real.
- Confusing discount points with origination points: Discount points buy down the rate. Origination points are a lender fee for processing the loan and do not reduce your rate. Always ask which type you are being charged.
- Not comparing offers correctly: Advertised low rates often include points in the fine print. A 6.0% rate that costs two points is not the same as a 6.0% rate with zero points. Compare Loan Estimates side by side, looking at both rate and points.
- Spending cash on points when you lack an emergency fund: Points are an investment in a lower rate, but they tie up cash. If paying points leaves you with no savings cushion, the risk is not worth the rate reduction.
- Forgetting that points are negotiable: Some lenders will negotiate the points-to-rate tradeoff or waive origination points to win your business. Shop multiple lenders and compare.
Related Concepts
Mortgage points are part of the broader cost structure of a home loan. They are a form of prepaid mortgage interest, and the deduction rules are tied to the same IRS framework. The interest rate you buy down is set by market conditions and the Federal Reserve's policy. The APR on your loan reflects points and other fees, giving a fuller cost picture than the note rate alone. Points are paid at closing, alongside other fees and your down payment. An origination fee is a separate lender charge that is sometimes confused with points. Borrowers can model how points affect their payment and total cost using our mortgage payoff early calculator and house affordability calculator.
Frequently Asked Questions
Q: How many points should I pay? A: It depends on your timeline. Calculate break-even for each point option and compare it to how long you realistically expect to keep the loan. As a rule of thumb, if you plan to stay 7 or more years and have the cash, one to two points often make sense. If you might move in 3 to 5 years, take zero points or lender credits.
Q: Are mortgage points tax deductible? A: Discount points may be deductible as mortgage interest in the year you pay them if they meet IRS criteria (customary in your area, computed as a percentage of principal, clearly shown on your settlement statement, and you brought sufficient funds to closing). If you do not meet all tests, you deduct them ratably over the loan term. Origination points are not deductible as interest. See IRS Topic 504 and Publication 936.
Q: Can I roll points into the loan amount? A: Generally no. The IRS requires that you bring funds to closing at least equal to the points charged for the points to be deductible in year one. Rolling points into the loan means you are borrowing the cost, which disqualifies the year-one deduction (though you may deduct ratably). Some lenders allow it, but it reduces the financial benefit.
Q: What is the difference between a permanent buydown and a temporary buydown? A: Discount points provide a permanent rate reduction for the life of the loan. A temporary buydown (like a 2-1 buydown) lowers the rate for the first 1 to 3 years, then the rate reverts to the note rate. Temporary buydowns are paid for by the seller or builder as an incentive and do not involve the same point calculation.
Q: Should I buy points if I think rates will drop and I will refinance? A: Probably not. If you refinance before break-even, the points you paid are wasted (though any unamortized portion may be deductible in the refinance year). If you expect rates to fall, take a zero-point loan and refinance when rates drop. The risk is that rates do not fall as expected, and you are stuck at a higher rate, but you have not lost upfront cash.
