Mortgage points — also called discount points — are upfront payments to a lender in exchange for a permanently lower interest rate. Whether paying points saves you money depends on how long you keep the loan. Understanding the math prevents both overpaying upfront and missing a genuine opportunity to reduce long-term interest costs.
What One Point Costs and Buys
One discount point equals 1% of the loan amount. On a $350,000 mortgage, one point = $3,500. In exchange, the lender reduces your interest rate — typically by 0.25% per point, though the exact reduction varies by lender and market conditions.
Lenders present rates at multiple combinations: no points, one point, two points, sometimes negative points (where the lender pays some closing costs in exchange for a higher rate — called lender credits). The Loan Estimate shows these options.
The Break-Even Calculation
Point cost ÷ monthly savings = months to break even.
Example: $350,000 loan, 30-year fixed. Base rate: 7.00%. With one point ($3,500): rate drops to 6.75%.
- Monthly payment at 7.00%: $2,329
- Monthly payment at 6.75%: $2,270
- Monthly savings: $59
- Break-even: $3,500 ÷ $59 = 59 months (about 5 years)
If you keep this loan for more than 5 years, paying the point saves money. If you sell or refinance before 5 years, you paid $3,500 for less than $3,500 in benefit.
Factors That Favor Buying Points
- You have strong confidence you’ll stay in the home long-term (well past break-even)
- You’re in a stable rate environment unlikely to trigger refinancing
- You have the cash to pay points without depleting reserves
- You’re in a high tax bracket where the additional mortgage interest deduction from the higher rate is less valuable (points themselves may be tax-deductible)
Factors Against Buying Points
- You might sell or refinance within the break-even period
- Rates may fall, making refinancing attractive before you recoup the cost
- You’d be depleting cash reserves needed for closing costs, emergency fund, or repairs
- The monthly savings are too small to meaningfully impact your budget, but the upfront cost is real
Negative Points (Lender Credits)
The reverse arrangement: you accept a higher interest rate and the lender credits you money toward closing costs. This makes sense when you’re cash-constrained at closing, expect to sell or refinance before the higher rate’s cost exceeds the credit received, or need to minimize upfront costs for liquidity reasons.
The break-even works the same way in reverse: at what point does the higher monthly payment cost more than the closing cost credit received?
Points vs. Larger Down Payment
If you have extra cash, comparing points vs. additional down payment is worth doing. A larger down payment reduces the loan balance (and therefore total interest paid over the life of the loan), while points reduce the rate. On the same loan, both approaches reduce long-term interest cost — the math favors one or the other depending on loan size, rate environment, and your specific numbers.
Are Points Tax Deductible
Mortgage points are potentially deductible on your federal income tax return as mortgage interest if the loan is for your primary residence and certain other conditions are met. For purchase loans, points are typically fully deductible in the year paid. For refinances, they’re generally amortized over the loan term. Consult a tax professional for your specific situation — this area of tax law has nuances.
The decision to buy points is a bet on how long you’ll keep the loan. Calculate the break-even for any points option you’re offered, compare it honestly to your expected tenure, and choose accordingly. Neither buying nor skipping points is universally better.
