Mortgage Points Explained: How Buying Points Lowers Your Rate

Quick primer

Mortgage points—often called discount points—are optional, prepaid interest you buy at closing to reduce your mortgage’s interest rate. Each point typically costs 1% of the loan amount and commonly lowers the rate by about 0.125%–0.50%, although the precise rate reduction varies by lender, loan program, and market conditions. (See Consumer Financial Protection Bureau for a concise overview.)CFPB

Background and context

The idea of prepaying interest to secure a lower rate dates back decades. Lenders use points to price loans so borrowers can trade higher upfront cash for a lower long‑term borrowing cost. In practice, the value of a point depends on the lender’s rate sheet and market competition. As a CFP® and CPA who has helped clients weigh this choice, I find the decision comes down to two questions: how long will you keep the mortgage, and how much cash can you reasonably deploy at closing?

How buying points actually lowers your monthly payment

Mechanically, when you pay points you increase the lender’s effective yield today, so the lender charges a lower contractual interest rate. For example, on a 30‑year fixed mortgage the rate reductions are typically offered in tiers: 0 points = current market rate; 1 point = a modest reduction (often 0.125%–0.25%); additional points give further reductions. The relationship isn’t linear and varies across lenders.

Mortgage payment formula (conceptual):
Payment = P × r / (1 − (1 + r)^−n)

• P = loan principal
• r = monthly interest rate
• n = total number of monthly payments

Lower r (after buying points) produces a lower monthly payment and a lower total interest cost across the loan term.

Real-world example and break-even math (practical walkthrough)

Assumptions (typical example): 30‑year fixed loan, $300,000 principal.

• No points: 4.00% interest → monthly payment ≈ $1,432.25
• Buy 1 point (cost = 1% of loan = $3,000), rate drops to 3.75% → monthly payment ≈ $1,389.35

Monthly savings = $1,432.25 − $1,389.35 = $42.90
Break‑even months = cost of points / monthly savings = $3,000 / $42.90 ≈ 69.9 months (~5.8 years)

If you plan to keep the loan longer than the break‑even period, buying the point pays back the upfront cost and delivers net savings thereafter. If you sell or refinance sooner, you typically lose money on the points.

Notes on the example:

• The dollar-and-rate relationship above is illustrative; different lenders price points differently (some offer a 0.125% cut per point, others 0.25% or more). Always get a lender price sheet showing how many basis points each point buys.
• Buying 2 points often doubles the upfront cost (2% of loan amount) and typically yields a larger rate cut; the break‑even math is the same.

Taxes: Are points deductible?

Tax treatment matters for the after‑tax value of points. As of 2025 the IRS rules generally are:

• Purchase of points on a mortgage to buy or build your primary home: points may be deductible in full in the year you pay them if certain tests are met (the loan is secured by your main home, the points are customary in your area, the amount is computed as a percentage of principal, you itemize deductions, and you have proof of payment). See IRS Publication 936 and the IRS points guidance for full details.IRS – Points
• Refinance: points paid to refinance generally must be deducted ratably over the life of the loan (the deduction is spread across the new loan’s term) unless you meet an exception such as using the refinance funds to build or significantly improve your main home.

Because tax rules change and depend on your situation, confirm deductibility with a tax pro and reference IRS publications when preparing returns.

When buying points makes financial sense

Buy mortgage points when:

• You expect to remain in the home (or keep the mortgage) significantly longer than the break‑even period.
• You have spare cash at closing and higher return alternatives (investments, paying down other high‑cost debt) are less attractive.
• Your marginal tax benefit (if you itemize and can deduct points) improves the effective payback timeline.

Avoid buying points when:

• You likely will sell or refinance within a few years.
• You need the cash for emergency savings or higher‑return uses.
• Your lender’s pricing is opaque or you can’t get exact verbal/written estimates showing the rate drop per point.

Negotiation and practical tips

• Ask for a lender price sheet that shows exactly how much each point reduces the rate. Lenders will also show “no‑point” and “points” scenarios on loan estimates.
• Compare offers from multiple lenders: one lender’s point may be worth more or less than another’s.
• Consider lender credits: you can take a higher rate and receive credits at closing that reduce your out‑of‑pocket costs. That’s the opposite trade of buying points.
• If you anticipate a refinance, read the seller’s or lender’s disclosures about points and check whether the points will be transferable or must be re‑paid.

For refinances specifically, review our related article How Interest Rate Buys (Points) Work During a Refinance for strategies lenders commonly use and how points behave when you reprice a mortgage: How Interest Rate Buys (Points) Work During a Refinance.

Also remember points are part of your closing costs; learn more about which closing fees are negotiable and typical cost ranges in our guide on Mortgage Closing Costs: Mortgage Closing Costs.

Common mistakes and misconceptions

• “Always buy points” is wrong: whether points are worth it depends on your timeline and cash flows.
• Underestimating liquidity needs: paying thousands at closing can deplete emergency reserves.
• Overlooking alternative uses of cash: paying down high-interest consumer debt or building savings can provide higher guaranteed returns than buying points.
• Treating points as a one-size-fits-all: lenders price points differently. Verify the actual rate movement tied to each point before paying.

Quick checklist for borrowers

• Get written estimates showing rate vs points from multiple lenders.
• Calculate monthly savings and break‑even months: break‑even = cost of points / monthly savings.
• Factor in taxes: ask your CPA whether points are deductible this year or must be amortized.
• Keep cash reserves after paying closing costs.
• Recalculate before refinancing: points paid on the old loan will not automatically transfer as value on a new loan.

Bottom line

Buying mortgage points is a cash‑for‑rate tradeoff: you pay more at closing to get a lower monthly payment and lower total interest. For borrowers planning to keep a mortgage well past the break‑even point and who have liquid cash to spare, points can be a cost‑effective tool to lower long‑term borrowing costs. But the math matters—run the numbers, check tax implications, and compare lender pricing before deciding.

Professional disclaimer

This article is educational and not personalized tax or investment advice. Rules about deductions and mortgage products change; consult a certified tax professional, CFP®, or licensed mortgage originator for advice tailored to your situation.

Sources and further reading

• Consumer Financial Protection Bureau — What are mortgage points? https://www.consumerfinance.gov/ask-cfpb/what-are-mortgage-points-en-161/
• Freddie Mac — Paying points on your mortgage https://www.freddiemac.com/learn/paying-points-on-your-mortgage
• IRS — Publications on home mortgage interest and points (see Publication 936 and related guidance) https://www.irs.gov/

Internal resources:

• How Interest Rate Buys (Points) Work During a Refinance: https://finhelp.io/glossary/how-interest-rate-buys-points-work-during-a-refinance/
• Mortgage Closing Costs: https://finhelp.io/glossary/mortgage-closing-costs/
• Mortgage Refinancing: When to Refinance and Cost Considerations: https://finhelp.io/glossary/mortgage-refinancing-when-to-refinance-and-cost-considerations/

(Prepared by a finance professional with 15+ years of client experience helping borrowers evaluate mortgage tradeoffs.)