What Are Points on a Mortgage? A Buyer’s Guide

What a mortgage point actually is

When lenders talk about “points,” they mean discount points: prepaid interest you pay at closing to reduce your mortgage rate. One point equals 1% of the loan amount — $4,000 on a $400,000 loan. Fractional points are common, and your Loan Estimate lists discount points as their own line item so you can see exactly what you’re paying.

One important distinction: discount points are not origination points. Origination fees are the lender’s charge for making the loan — they don’t lower your rate. Discount points do. If your paperwork just says “points,” ask your loan officer which kind you’re looking at before you agree to anything.

How points lower your rate

The industry rule of thumb is that one point buys your rate down about 0.25% — a $400,000 loan quoted at 7.28% might drop to roughly 7.03% with one point. But that 0.25% is a rule of thumb, not a promise: lenders reprice with the bond market daily, and the reduction depends on the loan type, the loan size and that day’s pricing.

The break-even math: a worked example

Break-even is the single number that matters. The formula is simple:

Break-even (months) = cost of the points ÷ monthly payment saving

Take a $400,000, 30-year fixed loan at 7.28%: principal and interest comes to $2,736.85 a month. Buy one point for $4,000, dropping the rate to about 7.03%, and the payment falls to $2,669.27 a month — a saving of $67.58 a month. Divide $4,000 by $67.58 and you get 59.2 months: roughly 59 months, or just under five years, before the point pays for itself. (Payment maths is our own; the exact reduction varies by lender.)

Everything after month 59 is profit. Stay ten years and the point nets you roughly $4,100. Keep the loan the full 30 years and the total saving is about $24,329, or roughly $20,329 after the $4,000 upfront cost. That’s the whole case for points: pay now, collect monthly, and win if you stay long enough.

When buying points pays off — and when it doesn’t

Buying points pays off when you’ll stay in the home well past break-even — think seven years or more — with cash to spare at closing. It also makes more sense when rates are unlikely to fall enough to justify refinancing: every refinance resets the clock, and the unused value of points you already bought simply disappears. A lower payment can also ease your monthly budget or your debt-to-income ratio at qualification.

Skip the points when you might move, sell or refinance within a few years — that’s the most common way buyers waste this money. Our refinance rule-of-thumb guide shows how soon a refinance can make sense; if that timeline is shorter than your break-even, points are a bad bet. Also skip them when you’re cash-tight: points compete with your down payment and reserves. An extra $4,000 toward the down payment lowers your balance permanently and can shrink or eliminate PMI — run both scenarios on our mortgage calculator first.

Points vs lender credits: the mirror image

A lender credit — sometimes called negative points — is the exact reverse. Instead of you paying to lower the rate, the lender pays you to accept a higher one: typically about 1% of the loan credited toward closing costs for a rate roughly 0.25% higher. On our $400,000 example, that’s about $4,000 of closing costs covered for roughly $68 more a month.

When does the credit win? When you’re short on closing cash, when you plan to move or refinance soon (why buy a rate you won’t keep?), or when you expect rates to fall and you’ll refinance anyway. Think of it as a dial: pay cash to turn your rate down, or accept lender cash to turn it up — the question is only which direction serves your timeline.

Are mortgage points tax deductible?

Often, yes — with conditions. Points paid on a loan to buy your main home are generally deductible in the year you pay them, provided IRS conditions are met: the loan must be secured by your main home, paying points must be an established local practice, and the amount can’t exceed what’s generally charged. Points paid on a refinance are usually deducted gradually over the life of the loan instead of all at once.

Tax rules and limits change, and deductibility also depends on whether you itemize, so confirm your situation with a tax professional rather than assuming the deduction. The IRS lays out the tests in Publication 936 if you want the primary source.