Background

Mortgage points have been used for decades to let borrowers trade cash at closing for a lower fixed interest rate. Lenders may call these discount points (to buy the rate down) or origination points (a fee). Borrowers who plan to keep a loan long enough can use points to lower total interest paid. For a plain primer on the different types of points and when they make sense, see our deeper explanations: Mortgage Points: When Paying Upfront Lowers Long-Term Costs and Understanding Mortgage Points: Discount Points vs. Origination Points.

How it works (step-by-step)

  1. Cost of points: 1 point = 1% of the loan amount. Two points = 2% of the loan.
  2. Rate reduction: Lenders quote how many basis points a point will cut off the interest rate (for example, 0.25% per point is common but not guaranteed). Ask each lender for the exact price-to-rate table.
  3. Monthly payment effect: A lower rate reduces your monthly principal-and-interest payment. Use the mortgage payment formula or an online calculator to compute the difference.
  4. Break‑even calculation: Break‑even months = (points cost) ÷ (monthly payment savings).

Example (accurate, reproducible math)

Assume a $300,000, 30‑year fixed mortgage.

  • If the no‑points rate is 4.00%, monthly payment (P&I) ≈ $1,432.25.
  • If buying 2 points (cost = 2% × $300,000 = $6,000) reduces the rate to 3.50%, payment ≈ $1,347.13.
  • Monthly savings = $1,432.25 − $1,347.13 = $85.12.
  • Break‑even months = $6,000 ÷ $85.12 ≈ 70.5 months ≈ 5.9 years.

That means you must keep the mortgage about 5.9 years before the cumulative monthly savings recover the $6,000 paid for points. If you sell or refinance sooner, you likely lose money on the purchase of points.

Practical considerations

  • Time horizon: Buying points works best if you plan to keep the mortgage beyond the break‑even date.
  • Opportunity cost: The cash used for points could alternatively be invested, used to pay down higher‑rate debt, or kept as savings. Compare the after‑tax return of buying points to other uses of cash.
  • APR vs rate: The APR factors in upfront fees (including points) and shows the loan’s cost across its term. Don’t rely solely on the nominal interest rate; compare APRs and the break‑even math.
  • Financing points: Some lenders let you roll points into the loan balance. That avoids cash at closing but increases the loan principal—and you still pay interest on that financed amount.
  • Seller or lender credits: Sellers or builders may pay points for you; in other cases, you can accept lender credits in exchange for a higher rate. See our guide Mortgage Points vs Credits: When Buying Down Your Rate Makes Sense for trade‑offs.

Tax treatment (brief, not tax advice)

Points paid on a mortgage to purchase or build your primary residence are generally deductible as mortgage interest in the year paid if they meet IRS conditions (see IRS Publication 530). For refinances and other circumstances, points are often deductible over the life of the loan. Confirm with a tax professional and review IRS guidance (IRS Publication 530) and CFPB’s explanation of mortgage points (Consumer Financial Protection Bureau).

Common mistakes and misconceptions

  • Assuming points always save money: If you move or refinance before break‑even, points cost you net cash.
  • Focusing only on monthly payment: Total cost, APR, opportunity cost, and taxes matter.
  • Forgetting lender-specific pricing: Rate-per-point varies by lender, loan program, and borrower credit profile.

Quick decision checklist

  • Calculate the break‑even point using your lender’s exact rate‑for‑points quote.
  • Ask whether points are paid to the lender, financed in the loan, or paid by seller credits.
  • Compare the net cash required at closing versus the monthly savings and your expected time in the home.
  • Check tax deductibility with a tax advisor (and IRS Publication 530).

Frequently asked questions

Q: Can I finance points into the loan?
A: Sometimes—lenders may allow financing points, which increases principal and interest costs. Compare the financed cost to paying cash.

Q: Are points refundable if I refinance early?
A: No—points are paid at closing and are not refunded if you refinance or sell. The only way to recover them is through the monthly interest savings while you hold the loan.

Q: Do points lower my loan’s APR?
A: Paying points lowers the nominal interest rate and can lower APR, but APR also includes fees. Use APR and break‑even math together.

Professional disclaimer

This article is educational and does not replace personalized financial, tax, or legal advice. For advice tailored to your situation, consult a mortgage professional and a tax advisor.

Authoritative sources

  • Consumer Financial Protection Bureau, “What are mortgage points?” (consumerfinance.gov)
  • Freddie Mac, “What Are Mortgage Points?” (freddiemac.com)
  • IRS, Publication 530, Tax Information for Homeowners (irs.gov/publications/p530)

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Last updated: 2025. For regulatory and tax changes, consult official sources.