Quick answer

Mortgage points (also called discount points) let you pay some interest at closing to get a lower ongoing rate. One point costs 1% of your loan amount and typically reduces the rate by roughly 0.125%–0.25% per point, though the exact reduction varies by lender and market conditions. Points can save money for borrowers who plan to keep the loan past the “break-even” point when cumulative monthly savings exceed the upfront cost.

How mortgage points actually work

There are two concepts often called “points”: discount points and origination points. This entry focuses on discount points, which buy a lower interest rate. Example mechanics:

  • Loan amount: $300,000
  • One point = 1% of loan = $3,000 paid at closing
  • Rate reduction: commonly about 0.25% (varies by lender)
  • Result: Lower monthly principal-and-interest payment and less interest paid over the loan term.

Because points are prepaid interest, you get a smaller monthly interest portion and faster principal paydown for the same amortization schedule. Lenders price point reductions differently; don’t assume the rule-of-thumb 0.25% per point applies precisely to your offer.

Sources: Consumer Financial Protection Bureau (CFPB) explainer on points and fees and the lender’s Good Faith Estimate/Loan Estimate. See CFPB guidance: https://www.consumerfinance.gov/ (search “points on a mortgage”).

How to calculate the break-even point (the single most important test)

The break-even point tells you how many months it will take for monthly savings to repay the upfront cost.

Break-even months = Upfront cost of points / Monthly savings

Example 1: single point on $300,000 loan

  • Upfront: $3,000
  • Monthly savings (approx): $75
  • Break-even = $3,000 / $75 = 40 months (about 3 years, 4 months)

If you expect to stay in the house or keep the mortgage longer than the break-even period, buying points may be worthwhile.

Important: When calculating monthly savings, use the actual rates the lender quotes (with and without points) and the loan’s amortization term. A mortgage calculator or spreadsheet that computes P&I at both rates is the most reliable method.

Tax treatment (what the IRS says)

Points paid to purchase or build your main home are generally deductible as mortgage interest in the year paid if you itemize and the points meet IRS rules. For example, points paid on a purchase usually qualify as deductible mortgage interest in year one if they are a percentage of the loan, the payment is customary in your area, and the points are not paid in lieu of other closing costs. See IRS Publication 936 for details: https://www.irs.gov/publications/p936

Points paid to refinance a mortgage normally must be deducted over the life of the loan (amortized), not all at once, unless the refinance proceeds are used to improve your principal residence and other specific conditions apply. Consult a tax professional—this summary is educational, not tax advice.

Real examples (practical scenarios)

Example A — Long-term homeowner who benefits:

  • Loan: $400,000
  • Buy 2 points = $8,000 upfront
  • Rate drops from 4.5% to 4.0%
  • Monthly P&I savings ≈ $200
  • Break-even = $8,000 / $200 = 40 months
    If the homeowner plans to remain more than 40 months, points likely make sense.

Example B — Short-term owner who doesn’t:

  • Loan: $250,000
  • Buy 1 point = $2,500
  • Monthly savings ≈ $60
  • Break-even ≈ 42 months
    If the borrower expects to move or refinance within 3 years, buying the point will likely lose money.

These examples are illustrative. Lenders’ rate reductions and point pricing vary.

When paying points tends to make financial sense

  • You plan to keep the mortgage longer than the break-even period (commonly 3–7 years for many borrowers).
  • You have extra cash after down payment and reserves and prefer lower monthly payments.
  • You’re in a relatively stable or rising rate environment and want to lock a lower fixed rate.
  • You want to maximize long-term interest savings and are comfortable tying up funds at closing.

When you should avoid buying points

  • You expect to move or refinance before the break-even date.
  • Your cash would be better used for higher-return opportunities (e.g., paying off high-interest debt, investing if your expected after-tax return is higher).
  • You lack emergency reserves—the money used to buy points should not deplete necessary savings.

How to shop and negotiate points

  • Ask lenders for the rate with zero points and the rate for each point increment (0.5, 1.0, 1.5 etc.).
  • Compare Loan Estimates side-by-side. Points must appear as separate line items.
  • Negotiate: some lenders will split the cost or waive lender credits and fees to meet pricing targets.
  • Consider lender credits (a higher rate in exchange for closing-cost credits). If you need cash at closing, credits may outweigh the benefit of points.

Related reading: Compare how points affect up-front costs with general closing fees in our guide to “Mortgage Closing Costs: Common Fees and How to Save” (https://finhelp.io/glossary/mortgage-closing-costs-common-fees-and-how-to-save/).

Practical checklist to evaluate points before you sign

  1. Get exact rates for both options: with and without points. Use the lender’s Loan Estimate.
  2. Compute monthly P&I at both rates for the same term (15- or 30-year) and record the difference.
  3. Calculate break-even months = points cost / monthly savings.
  4. Compare break-even to your expected time in the house.
  5. Check tax rules (purchase vs refinance) and talk to your CPA if the tax impact matters.
  6. Confirm points appear as separate line items on the Closing Disclosure and that the lender provides written documentation of the advertised rate reduction.

Common mistakes I see in practice

  • Using the rule-of-thumb 0.25% per point without verifying the lender’s actual pricing.
  • Neglecting the opportunity cost of the cash used for points (could that money reduce higher-interest debt?).
  • Forgetting that refinance points are usually amortized for tax deduction purposes.
  • Assuming points are refundable—once paid, points are rarely refundable if a transaction falls apart for non-seller reasons.

Frequently asked questions (short answers)

  • Are points negotiable? Yes. Lenders often have flexibility and pricing that can be shopped.
  • Can you finance points into the loan? Some lenders allow you to finance points, but then you pay interest on that financed balance; the economics change and could lengthen break-even.
  • Do discount points affect APR disclosures? Yes—the APR on the Loan Estimate will reflect the cost of points and gives a standardized way to compare offers.

Internal resources and further reading

Authoritative sources

Professional disclaimer

This article is educational and reflects general rules and examples current as of 2025. It does not replace personalized advice from a tax professional or mortgage advisor. In my practice as a financial educator, I recommend borrowers run precise amortization comparisons and consult their CPA before relying on tax deductions.

By following the break-even test, checking the tax treatment for your situation, and shopping multiple lenders, you can decide whether paying mortgage points will lower your long-term housing costs.