What Are Discount Points? How Mortgage Points Work

When you get a mortgage to buy a home, your lender may offer you a choice: pay extra money at closing to get a lower interest rate. Those extra payments are called discount points. This guide explains how they work, how to tell if they are worth it, and where to find them on your Loan Estimate.

What is a discount point?

A discount point is a fee you pay your lender at closing in exchange for a lower interest rate. Think of it as prepaying some of your interest. One point equals 1% of your loan amount, so one point on a $300,000 loan costs $3,000. Lenders also sell partial points, such as half a point (0.5%) or a quarter point (0.25%).

How much does a discount point lower my rate?

A common rule of thumb is that one point lowers your rate by about 0.25%, which is a quarter of a percentage point. It is only a rule of thumb. Some lenders give less, some give more, and the amount changes with the market and your loan. Ask each lender for quotes with and without points.

Example: is one point worth it?

Say you borrow $300,000 on a 30-year fixed loan. These numbers are for illustration only and are not current rates.

The point costs $3,000 and saves about $49 a month. A simple way to estimate the break-even is to divide the cost by the monthly savings: $3,000 ÷ $49.05 is about 61 months, or a little over 5 years.

A fuller calculation also counts that the lower rate pays down your loan faster, so the real break-even comes a little sooner: about 48 months, or 4 years. Here is how it looks if you keep the loan for different lengths of time, using the fuller calculation:

If you sell or refinance before the break-even point, you spent more on the point than you saved. If you keep the loan well past it, the point comes out ahead.

How to find your break-even point

1. Find the cost of the points. Multiply your loan amount by the points, such as 1% for one point.
2. Find your monthly savings. Subtract the monthly principal and interest with points from the monthly payment without them.
3. Divide the cost by the monthly savings. The answer is the number of months until the points pay for themselves.

This simple method is a quick check. The discount points calculator does the fuller math, and it lets you add extra principal payments, which can push the break-even later or even keep the points from ever paying off. The rate estimator also shows the cost, monthly savings, and break-even when you choose a number of points.

When points can make sense

• You expect to keep the loan for many years.
• You have cash left after your down payment, closing costs, and emergency savings.
• You want a lower monthly payment that you can count on for the life of the loan.

When points may not be worth it

• You may sell or refinance within a few years. Many people do so long before the loan is paid off.
• Cash is tight. Money spent on points is not available for the down payment, repairs, or savings.
• The same cash could do more elsewhere, such as a larger down payment that lowers the loan amount.

Discount points vs. origination points

Discount points lower your interest rate. Origination points, or an origination fee, pay the lender for processing and underwriting your loan, and they do not lower your rate. On the Loan Estimate, points show up in Section A, Origination Charges, on the line labeled “% of Loan Amount (Points).” Ask your lender what each charge in that section is for.

Lender credits: the opposite of points

A lender credit works the other way. You accept a higher interest rate, and the lender gives you money toward your closing costs. On the Loan Estimate, credits appear in Section J. Credits can help if cash is tight or you expect to move or refinance soon, but the higher rate costs more every month.

How a temporary buydown is different

A temporary buydown, such as a 2-1 buydown, lowers your rate for the first year or two, and then it rises to the full rate. That is different from discount points, which lower the rate for the whole loan.

Can the seller pay for my points?

Sometimes. A seller can agree to pay part of your closing costs, which can include points. Loan programs limit how much a seller can contribute, so ask your lender.

Are discount points tax deductible?

Points paid to buy your main home may be deductible in the year you pay them, if you itemize deductions and meet the IRS requirements. Points on a refinance usually must be deducted gradually over the life of the new loan. Tax rules change and depend on your situation, so ask a tax professional.

How to compare offers that have points

Compare offers at the same number of points, or compare the total cost over the time you expect to keep the loan. Looking at the rate alone can mislead you, because a lower rate may come from points that cost thousands of dollars. The points are included in the Total Loan Costs on your Loan Estimate.

Common questions about discount points

How much does a discount point cost?

One point costs 1% of your loan amount. On a $250,000 loan, one point is $2,500 and half a point is $1,250.

Does one point always lower my rate by 0.25%?

No. About 0.25% per point is a common rule of thumb, but lenders price points differently, and the amount can change with the market and your loan. Ask each lender for a quote with and without points.

How long does it take to break even on points?

Divide the cost of the points by the amount they save you each month. In the example on this page, one point costs $3,000 and saves about $49 a month, which is about 61 months. A fuller calculation that also counts how much faster the lower rate pays down the loan puts it at about 48 months. The discount points calculator does the fuller math, including extra payments.

Are mortgage points worth it?

They can be, if you keep the loan longer than your break-even point and have cash to spare. They are usually not worth it if you may sell or refinance in a few years, or if the money is needed for your down payment, repairs, or savings.

Can I roll discount points into my loan?

Sometimes, especially on a refinance. If a lender allows it, the points are added to your loan balance, so you pay interest on them and your break-even takes longer. Loan limits still apply.

Are discount points the same as closing costs?

Points are one kind of closing cost. Closing costs also include fees for things like title, appraisal, and recording. Points are optional, while most other closing costs are not.

Are discount points tax deductible?

Points paid to buy your main home may be deductible in the year you pay them if you itemize and meet IRS requirements. Points on a refinance usually must be deducted gradually over the life of the new loan. Tax rules depend on your situation, so ask a tax professional.