What Are Mortgage Points?

Mortgage points, also known as discount points, are an option for buyers to pay an upfront fee at closing to buy down the interest rate on a loan. The term ''points'' is a common way of referring to a percentage of your loan amount.

For example, one discount point will cost you 1% of your loan amount and will lower your interest rate by 0.25%. That means if you’re taking out a mortgage with a 6.5% interest rate and you buy one mortgage discount point, your interest rate will drop to 6.25%.

While less common, you may also hear your lender use the term points when talking about origination fees and lender credits. These costs are also represented as a percentage of your loan amount and paid for at closing.

How do mortgage points work?

When you choose to buy mortgage discount points, you’re essentially pre-paying interest upfront in exchange for a lower interest rate and lower monthly payments. You’ll pay for the mortgage points at the same time you pay closing costs, and the amount will be detailed on your loan estimate and closing disclosure.

Lenders may let you buy as little as a fraction of a point (0.5% of the loan amount) for an interest rate reduction of 0.125%. The more points you buy, the lower your interest rate. Keep in mind, federal and state laws limit the amount of closing costs a buyer can pay, which means there is a cap on the number of points you’re able to buy.

Lenders will also only offer discount points on the fixed-rate period of your loan term. If you’re financing your home with an adjustable-rate mortgage, you can purchase points to lower the interest rate on the initial first few years (when your rate is fixed) but not on the variable rate period.

Pro tip: When shopping for a mortgage, look at the interest rate and the APR. You may see one lender advertise a lower interest rate than another but then have a higher APR. The APR will factor in both the interest rate and the cost of points and lender fees to give you a more realistic lender comparison.

How much are mortgage points?

Each mortgage discount point will cost you 1% of the loan amount and cut your interest rate by 0.25%. On a $300,000 loan at 6.25%, one discount point would cost you $3,000 and lower your interest rate to a flat 6%. Any points you buy will be added into your closing costs, unless you previously negotiated with the seller to have them cover the cost of points for you.

The table below shows you the cost per point and the interest rate reduction you’ll likely receive for each discount point you purchase.

Are mortgage points worth it?

Choosing whether to buy discount points or not comes down to when you’ll reach your break-even point. The break-even point is calculated by dividing the cost of points by the monthly payment savings to show you how many months it will take you to make a profit. Lenders can help you calculate your break-even point and show you multiple loan options to help you make an informed decision.

Point cost / Monthly Payment Savings = Months to Break-Even Point

The longer you own your new home, the better the chance that you’ll reach the break-even point. Here’s an example. If you buy down a 6.5% interest rate with 1 mortgage discount point on a $300,000 mortgage with a 30-year fixed-rate and a 3% down payment, you’ll reach your break-even point in about 5 years and 2 months.

How much will you save by buying mortgage discount points?

Your savings with discount points depends on a few factors: Your loan, your down payment and your interest rate. Let’s say you’re taking out a fixed-rate, 30-year loan for $300,000 with a 3% down payment and a 6.5% interest rate. If you purchase 1 point, you’ll lower your monthly interest by 0.25% — saving you over $17,000 in loan interest.

*Monthly payment includes the cost of principal and interest only, not taxes and insurance.

FAQs about mortgage points

Is it better to pay points or increase your down payment?

Buying discount points and putting down a larger down payment can both lower your monthly mortgage payments. The benefit to paying more towards a down payment is that your money goes toward the principal, increasing your equity in the home and decreasing the amount you are borrowing. When buying mortgage discount points, your money is going toward the interest, which means you’ll own less of the home and be borrowing more.

The reason why some people choose to buy discount points vs putting down a larger down payment is because the upfront cost is usually less. You typically need to put down at least 10% before you start to notice a big difference in your monthly savings. A 20% down payment will allow you to remove the additional cost of mortgage insurance — which can help you save even more over your loan term. Talk to a mortgage expert to calculate the best option for you based on your loan details, available cash, monthly budget and how long you plan to stay in the home.

Are points the same as lender credits?

Lender credits are the inverse of discount points. Instead of paying more cash up front in exchange for a lower interest rate, with lender credits, you pay a slightly higher interest rate in exchange for money from your lender to cover your closing costs. This can be an appealing approach for buyers who can afford the monthly payment, but may not have ample cash available to cover all their closing costs. The amount of credits a lender will offer may vary, so start the discussion early either when getting pre-approved.

Is it better to take a lender credit or a lower interest rate?

Lender credits require you to pay less upfront at closing, but increase your interest rate which means you’ll make larger monthly payments. Discount points require you to pay more in closing costs but will lower your monthly payments. Buying points makes the most sense when you plan on staying in the home for many years. If you’re unsure which path is right for you, ask your lender. They can share multiple financing options with and without points and credits.

When to buy points on a mortgage?

Buying mortgage points makes the most financial sense when you plan on living in your home long enough to reach the break-even point. Usually, it’s not advised to buy discount points if you’re able to make a larger down payment. The more money you’re able to put down, the lower your monthly mortgage payments will be and the more equity you’ll have in your home.

You may consider buying points on a mortgage when: 

• You don’t plan on moving or refinancing before the breakeven point.
• You don’t plan to pay extra toward your principal every month.
• You don’t have enough cash to cover a 20% down payment to cancel mortgage insurance, but you want to lower your monthly expenses with the cash you do have.

How much does 1 point lower your interest rate?

Each mortgage point you buy lowers your interest rate by 0.25%. So, if you’re taking out a $300,000 home loan with a 10% down payment (making your loan amount $270,000), each point would cost you $2,700. If your interest rate was at 6.5%, buying a discount point would lower your interest rate to 6.25%.

Are mortgage points tax deductible?

Mortgage points are considered prepaid interest and are tax deductible for the year you buy the house. You’ll need to itemize your deductions on Schedule A (Form 1040) to deduct discount points. You may only be able to deduct part of your mortgage interest. Talk to a tax professional to learn more about deductions you may be eligible for in the year you purchase a home.