| Points paid | Upfront cost | Sample rate | Effect |
|---|---|---|---|
| 0 points | 0 dollars | 6.5 percent | Higher payment, no upfront cost |
| 1 point | 3,000 dollars | 6.25 percent | Modest monthly savings |
| 2 points | 6,000 dollars | 6.0 percent | Larger savings, longer break-even |
Glossary · Financing & mortgages
Discount Points
Discount points, also called mortgage points, are upfront fees you pay the lender at closing to lower your interest rate, a move known as buying down the rate. One point typically costs 1 percent of the loan amount. Paying points can save money if you keep the loan long enough to pass the break-even point.
Also known as: Mortgage Points
How do discount points work?
You pay a point, equal to 1 percent of the loan amount, and the lender lowers your rate by a set fraction. The exact reduction varies by lender and market conditions. You can often buy fractional points, and the more you pay, the lower your rate.
Each point trades cash today for a smaller monthly payment over the life of the loan. A point commonly cuts the rate by around a quarter percent, though this shifts with the market.
The value of points depends on how long you hold the loan. Sell or refinance early and you may never recover the upfront cost.
Why does the break-even point matter?
The break-even point is when accumulated monthly savings equal the upfront cost of the points. Keep the loan past that point and buying points pays off; sell or refinance sooner and you lose money. Break-even is the key test for whether points make sense.
To find break-even, divide the cost of the points by the monthly payment savings. The result is the number of months you must keep the loan to come out ahead.
Buyers who plan to stay put for many years benefit most. Those likely to move or refinance soon usually keep the cash instead.
What is the difference between discount points and origination points?
Discount points buy down your interest rate and are optional. Origination points are a fee the lender charges to process and originate the loan and do not lower your rate. Both cost about 1 percent per point, so read your loan estimate carefully.
Origination charges compensate the lender for making the loan. They appear on your loan estimate and add to closing costs without reducing your rate.
Discount points may be tax deductible in some situations, unlike some other fees. Confirm eligibility with a tax professional before assuming a deduction.
Worked example. For example, a borrower with a 300,000 dollar loan pays 2 points, costing 6,000 dollars, to lower the rate from 6.5 percent to 6.0 percent. That cuts the monthly payment by about 95 dollars. Dividing 6,000 dollars by 95 dollars gives roughly 63 months, so they must keep the loan more than five years to break even.
Common mistakes with Discount Points
- Do not buy points if you plan to sell or refinance before the break-even point, because you will lose money.
- Do not confuse discount points with origination points, since only discount points lower your interest rate.
- Do not assume every point cuts the rate by the same amount, because the reduction varies by lender and market.
- Do not spend your down payment cash on points, since a larger down payment may help you more than a slightly lower rate.
- Do not assume points are always tax deductible, because eligibility depends on current tax rules and your situation.
Related terms
Term
Fixed-Rate Mortgage
A mortgage with an interest rate that stays the same for the entire loan term.
Define TermClosing Costs
The fees and expenses, beyond the purchase price, that buyers and sellers pay to finalize
Define TermConventional Loan
A mortgage not insured or guaranteed by the government, often following Fannie Mae and Fre
Define TermAdjustable-Rate Mortgage (ARM)
A mortgage whose interest rate can change periodically based on a market index.
DefineDiscount Points FAQ
How much does one mortgage point cost?
One discount point typically costs 1 percent of the loan amount. On a 300,000 dollar loan, that is 3,000 dollars paid at closing. You can often buy fractional points, such as half a point for 1,500 dollars.
How much does a point lower my rate?
A point commonly lowers the interest rate by around a quarter of a percent, but the exact reduction depends on the lender and current market. Always ask for the specific rate at each point option on your quote.
Are discount points worth it?
Points are worth it if you keep the loan past the break-even point, when accumulated savings exceed the upfront cost. Buyers who expect to move or refinance soon usually skip points and keep the cash instead.
Can the seller pay my discount points?
Yes, a seller can contribute to your closing costs, including points, through a seller concession. Loan programs cap how much sellers may pay, so confirm the limit for your loan type before negotiating.
Are mortgage points tax deductible?
Discount points may be deductible as mortgage interest in some cases, often on a primary residence purchase. Rules and limits change, so confirm eligibility with a tax professional or current IRS guidance before claiming a deduction.
Real estate glossary
Open glossary →