Overview

Mortgage points are a common but often misunderstood element of mortgage pricing. Lenders quote interest rates and close costs, and points let borrowers shift money between those two lines: pay more at closing to lower the rate, or pay less at closing and accept a higher rate. There are two distinct types:

  • Discount points: Prepaid interest you buy to reduce the annual interest rate.
  • Origination points (or loan origination fees): Fees the lender charges to process, underwrite, and close the loan.

Understanding the difference matters because discount points affect your monthly payment and interest paid over the life of the loan, while origination points are a closing cost that usually do not lower your rate.

(Consumer Financial Protection Bureau explains mortgage points and how they show up on closing documents: https://www.consumerfinance.gov/ask-cfpb/what-are-mortgage-points-en-120/.)

How discount points work — a practical explanation

A discount point typically costs 1% of the loan amount and is commonly described as “one point.” It functions as prepaid interest and often reduces the interest rate by a lender-specific amount — commonly 0.125% to 0.25% per point on conventional loans, but the exact amount varies by lender, market conditions, and loan program.

Key facts:

  • Cost: 1 point = 1% of the loan principal (e.g., $3,000 on a $300,000 mortgage).
  • Typical rate impact: 0.125%–0.25% per point (varies).
  • Effect: Lowers monthly principal-and-interest (P&I) payments and total interest over the loan term.

Example (illustrative):

  • Loan amount: $300,000, 30-year fixed
  • Rate without points: 4.00% → monthly P&I ≈ $1,432.25
  • Rate after 1 discount point (assume −0.25%): 3.75% → monthly P&I ≈ $1,388.89
  • Monthly savings: ≈ $43.36
  • Cost of 1 point: $3,000
  • Break-even: $3,000 / $43.36 ≈ 69 months (~5.8 years)

If you plan to stay in the home longer than the break-even period, buying the point can save money over the life of the loan. If you expect to sell or refinance sooner, you likely won’t recoup the upfront cost.

In my practice I’ve seen clients save thousands by buying points when they intended to stay 10–15 years, but lose money when timelines were shorter. Always run the math for your specific loan size and quoted rate improvement.

How origination points work

Origination points are a form of lender fee. They generally equal a percentage of the loan (commonly expressed as 1% = one origination point) and compensate the lender for underwriting, processing, and taking the loan on their books. Origination points:

  • Do not reduce the interest rate (unless the lender describes them as partially buying a rate).
  • Appear on the Closing Disclosure as “origination charge,” “loan origination fee,” or similar.
  • Are negotiable in many cases and sometimes payable by the seller.

Because origination points are essentially a fee, they increase your closing costs but don’t directly lower monthly payments. However, you can sometimes trade rate for origination fee (or vice versa) in negotiations — for example, accept a higher rate in exchange for lender credits that reduce closing costs.

APR, lender credits, and how points affect comparisons

The Annual Percentage Rate (APR) gives a broader view of borrowing cost because it spreads upfront fees across the loan’s life. Buying discount points lowers the APR because it reduces ongoing interest; paying origination points increases the APR because they raise upfront costs without lowering the rate.

Lender credits and “negative points” are the inverse: you accept a slightly higher interest rate and the lender gives money (a credit) to reduce your closing costs. Always compare both the nominal interest rate and APR plus the absolute out-of-pocket cost when choosing between offers.

Tax treatment (what the IRS says)

Tax rules affect whether points are deductible as mortgage interest. The IRS allows deduction of discount points when they meet certain rules, generally summarized:

  • For a purchase of your principal residence, discount points you pay are often deductible in the year paid if they are customary in your area and clearly stated as points.
  • Points paid for refinancing are typically amortized and deducted over the life of the loan, not entirely in the year paid.
  • Origination fees that are not actually charged as interest (i.e., true fees) are generally not deductible as mortgage interest but can be part of the basis when you sell the home or deductible in certain cases—check IRS guidance.

See IRS Publication 936 for full details on points and home mortgage interest (https://www.irs.gov/publications/p936) and consult a tax professional to apply the rules to your situation.

How to evaluate whether points are worth it

Use this checklist to decide if buying discount points makes sense:

  1. Ask for the lender’s exact quote that shows the rate reduction per point.
  2. Calculate the monthly savings and the break-even period: break-even months = cost of points / monthly savings.
  3. Compare the break-even to your expected time in the home or time to next refinance.
  4. Review the APR on the Loan Estimate and Closing Disclosure to account for all fees.
  5. Consider tax effects — whether points are deductible now or amortized.
  6. Negotiate: ask if origination fees can be reduced or if seller-paid points are an option.

Formula recap for monthly payment (P&I) used in examples:

M = P * r / (1 – (1 + r)^-n)

where M = monthly payment, P = loan principal, r = monthly interest rate (annual rate/12), and n = total payments.

Common scenarios and recommendations

  • Short-term stay (≤ break-even): avoid buying discount points; keep cash for moving, repairs, or emergency funds.
  • Long-term stay (> break-even): buy discount points if they lower APR and you have the cash; this is often cost-effective for 30-year loans.
  • Refinances: expect points paid to be amortized over the loan term for tax purposes; treat them as a longer-term expense.
  • Negotiation: ask lenders to itemize origination fees and point costs on the Loan Estimate, and compare multiple lenders. See how lenders allocate fees in closing (related: “How Lender Fees Are Allocated During Mortgage Closing”) (https://finhelp.io/glossary/how-lender-fees-are-allocated-during-mortgage-closing/).

Seller-paid points and credits

Sellers can pay buyer’s discount points as part of negotiations. Seller-paid points still reduce the buyer’s rate but may alter closing cost contributions. Make sure the Loan Estimate and Closing Disclosure correctly reflect who pays the point so you can evaluate tax treatment and APR impact.

Practical tips and negotiation strategies

  • Always get the numeric relationship: exact rate reduction per point.
  • Compare offers by APR and by total cash due at closing.
  • Use lender credits if you prefer lower closing costs over a lower rate.
  • Ask whether points are refundable if the loan is sold or re-priced (rare, but worth checking).
  • Confirm how points appear on the Closing Disclosure and whether the points are customary in your area — this matters for tax deductibility.

Interlinks for deeper reading

Real-world note from my practice

In advising borrowers over 15+ years, I’ve seen two patterns: (1) borrowers who planned to hold a loan for 7–10+ years often benefited from buying discount points, and (2) borrowers focused on short-term flexibility favored lender credits to reduce upfront costs. The numbers always tell the story — run the break-even math, and treat points as a choice between cash now and cash later.

Sources and further reading

Professional disclaimer: This article is educational and not individualized tax or financial advice. Tax rules change; consult a CPA or tax advisor and your mortgage professional before deciding whether to buy points.