Mortgage Points Explained — Should You Buy Down Your Rate?
Mortgage discount points let you prepay interest upfront to secure a lower interest rate. Whether buying points makes sense depends entirely on how long you'll keep the loan. Here's how to do the math.
What Are Mortgage Points?
One mortgage discount point equals 1% of your loan amount and typically reduces your interest rate by 0.125%–0.25% depending on the lender and market conditions. Points are paid at closing and appear on your Loan Estimate as 'Discount Points.'
Points are separate from origination fees. Origination fees are lender compensation — you're paying for the service. Discount points are optional and purely about trading upfront cash for a lower rate.
How to Calculate Break-Even
The break-even calculation: (Cost of points) ÷ (Monthly payment savings) = Break-even months. If 1 point costs $4,000 and saves $55/month, your break-even is 72 months (6 years). If you keep the loan past 6 years, the points paid off. If you sell or refinance before then, you lost money.
Example: $400,000 loan. 1 point = $4,000. Rate drops from 7.0% to 6.75%. Monthly P&I savings = $67. Break-even = 60 months (5 years). If you stay in the house 10+ years, buying the point is a clear win. If you move in 3 years, you wasted $4,000.
When Buying Points Makes Sense
Buy points when: you plan to stay in the home long-term (7+ years), you have excess cash after down payment and closing costs, you're rate-sensitive and want to lock in the lowest possible payment, or you're buying a forever home and want to minimize total interest paid.
Don't buy points when: you expect to sell or refinance within 5 years, you're stretching to make the down payment and closing costs (never sacrifice emergency reserves for points), or you're not certain about your long-term plans.
Negative Points (Lender Credits)
The inverse of buying points is taking lender credits — you accept a slightly higher rate in exchange for the lender covering some or all of your closing costs. This is the 'no-closing-cost loan' structure. It works in reverse: higher rate, lower upfront cost, shorter break-even for moving.
Lender credits make sense for the same reasons buying points does not: short expected hold period, limited cash reserves, or uncertainty about your timeline. Your loan officer can show you the full pricing grid — rate vs. points vs. lender credits — so you can choose the right tradeoff for your situation.
Common Questions
Are mortgage points tax deductible?
Discount points paid on a home purchase loan are generally deductible in the year you paid them, provided you meet IRS requirements (the loan is for your primary residence, points are computed as a percentage of the loan, and other conditions). Refinance points must be deducted over the life of the loan. Consult a tax advisor.
How many points can you buy on a mortgage?
Typically 0–4 points, though lenders vary. There are limits on how much a borrower can pay in points under qualified mortgage rules. Each additional point has diminishing returns — the first point usually saves the most per dollar spent.
What is the difference between points and APR?
Points are an upfront cash payment. APR (Annual Percentage Rate) is a calculated number that incorporates the interest rate plus most upfront costs (including points) to express the true annual cost of the loan. Two loans with the same rate but different points will have different APRs — the one with more points will have the higher APR.
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