What are mortgage points and are they worth paying?
One discount point costs 1% of your loan amount and buys a lower interest rate — commonly around a quarter of a percentage point, though the exact trade varies daily by lender. Points are worth paying only if you keep the loan past the break-even month, which is the point cost divided by the monthly payment saving.
Points are prepaid interest. You hand over cash at closing and the lender reduces your interest rate for the life of the loan. One point equals 1% of the loan amount — $4,000 on a $400,000 mortgage.
Working out your break-even
The arithmetic is simple and it is the only thing that matters:
- Take the cost of the points in dollars.
- Divide by the monthly payment reduction they buy.
- The result is the number of months you must keep the loan to come out ahead.
If one point costs $4,000 and lowers your payment by $60 a month, you break even at about 67 months — a little under six years. Keep the loan longer and the points were worth it. Sell, refinance or pay it off sooner and you lost money.
The question behind the question
Most borrowers do not keep a 30-year mortgage for 30 years. People move and they refinance. So the honest version of “are points worth it” is “how confident am I that I will still have this exact loan in six years?” If the answer is not very, the cash is usually better kept.
Negative points
The trade runs both ways. A lender credit — sometimes called negative points or a rebate — is the mirror image: you accept a higher rate and the lender pays some of your closing costs. For a borrower who is short on cash at closing or expects to move soon, that can be the better side of the trade.
Related questions
How much does one point lower my rate?
There is no fixed exchange rate. A quarter of a percentage point per point is a common rule of thumb, but the real trade is set daily by the secondary market and differs between lenders. Always ask for the actual rate at zero points and the actual rate at one point, then do the break-even arithmetic on those two numbers.
Are points tax deductible?
Discount points on a primary residence purchase are generally deductible in the year paid, and points on a refinance are usually deducted over the life of the loan. Deductibility depends on your circumstances, so treat this as a question for a tax professional rather than a lender.
Are origination points the same as discount points?
No, and the distinction matters. Discount points buy down your rate. Origination points are the lender's fee for making the loan and buy you nothing. Both appear in Section A of the Loan Estimate, so read the labels rather than the total.