Quick summary

Mortgage points (also called discount points) are prepaid interest: you pay a percentage of the loan amount at closing to lower the mortgage rate. Mortgage credits (sometimes called lender credits or seller concessions) are amounts the lender gives to reduce your closing costs in exchange for a higher interest rate. The tradeoff is cash now versus interest saved over time.

This article explains how points and credits work, shows a clear break‑even calculation, offers real examples, highlights tax considerations, and provides practical decision steps based on cash flow and time horizon. It also links to related FinHelp resources about points and mortgage portability for readers who want deeper context.

How mortgage points and lender credits work

  • Mortgage points: One point equals 1% of loan amount. Buying discount points lowers your rate; the lender offers a rate schedule that lists how many points reduce the rate by specific increments (e.g., 0.25% per point). You pay points at closing.
  • Mortgage credits: The lender gives you cash toward closing costs. In return the lender sets a slightly higher interest rate for the life of the loan. Credits can cover some or all closing costs, helping buyers with limited cash.

In my practice as a mortgage and financial adviser, the most common scenario is a buyer choosing credits when they don’t have enough cash to close, or when they prefer to use savings for a down payment or home repairs. Buyers who plan to stay long term often benefit from buying points because the interest savings compound over many years.

(See also: Understanding Origination Fees and Points on Mortgages and Mortgage Portability: Taking Your Rate and Term to a New Home).

Simple math: How to calculate the break‑even point

The break‑even point tells you how long it takes for the monthly savings from a lower rate (paid for by points) to equal the upfront cost of those points.

Break‑even months = Cost of points / Monthly payment savings

Example:

  • Loan amount: $300,000
  • Cost of 1 point: 1% × $300,000 = $3,000
  • Rate without points: 4.00% → monthly principal & interest payment ≈ $1,432
  • Rate with 1 point (3.75%): payment ≈ $1,389
  • Monthly saving ≈ $43
  • Break‑even = $3,000 / $43 ≈ 69.8 months → about 5.8 years

If you expect to keep the loan more than the break‑even period, buying the point is typically the better financial play. If you expect to sell or refinance sooner, lender credits or keeping the higher rate may be better.

Important nuance: The calculation above looks only at principal & interest. If you would otherwise have paid private mortgage insurance (PMI), or if buying points changes the loan-to-value ratio and eliminates PMI, include those savings in the monthly savings calculation.

Example scenarios (realistic, practical)

1) Long‑term owner (15+ years): Buying points usually makes sense if you have the cash and the break‑even is within the time you plan to stay. Over decades even small rate differences can save tens of thousands of dollars in interest.

2) Short‑term owner (under 5 years): Take credits or keep the higher rate. The upfront cost to buy down the rate rarely pays off in a short ownership period.

3) Tight cash at closing: Credits can be lifesaving. Some buyers prefer credits to preserve reserves for repairs, moving costs, or emergency savings.

4) Investment property: Credits are common because landlords may prioritize cash flow and flexibility. Also, investment mortgages often have higher rates and different point structures.

Real client vignette: A first‑time buyer had $8,000 available at closing. The loan officer offered $5,000 in lender credits in exchange for a 0.25% higher rate. After running the break‑even (and factoring in the buyer’s plan to renovate and resell in ~4 years), we chose credits so she could fund renovations that increased resale value. If she had planned to stay 10+ years, the analysis would have favored buying points.

Tax treatment and recordkeeping

Points can be tax‑deductible as mortgage interest under IRS rules when they meet specific conditions (typically for a primary residence and when points are a customary charge, among other requirements). The general guidance appears in IRS Publication 936 (Home Mortgage Interest Deduction) and related IRS pages about points and interest. Lender credits are not deductible — they are a reduction to closing costs, altering what you report as basis for deductibility. Always keep closing statements (HUD‑1 or Closing Disclosure) and Form 1098 from your lender for tax records. Consult a tax professional for your situation (IRS: Publication 936; CFPB guidance on shopping for mortgages).

Authoritative sources: Consumer Financial Protection Bureau (CFPB) explains closing costs and how lender credits work; the IRS covers when points are deductible (see IRS publications). These sources should be consulted for up‑to‑date, personal tax rules (CFPB: https://www.consumerfinance.gov/, IRS: https://www.irs.gov/).

When a lender’s credit makes sense beyond cash flow

  • You want to invest the money you would have used to buy points into higher-return projects (e.g., home renovations that boost resale value).
  • You expect interest rates to fall and plan to refinance soon; paying for points now has limited value if you’ll refinance to a lower market rate.
  • You need to meet a specific closing date or contract contingency where seller concessions are part of negotiations.

Hidden details lenders use in pricing

  • Rate sheets: Lenders publish pricing grids that show how rate changes by points. Different lenders price points differently, so shop around.
  • Re‑underwriting: Buying points typically doesn’t change underwriting, but lender credits might be limited by program rules (VA, FHA, conventional) or by maximum allowable seller concessions.
  • APR vs note rate: The APR includes certain upfront costs and can make point purchases look better or worse depending on the math. Compare both the note rate and APR when evaluating offers.

For more on how origination fees and points fit into overall loan pricing, see our related FinHelp article “Understanding Origination Fees and Points on Mortgages.” (https://finhelp.io/glossary/understanding-origination-fees-and-points-on-mortgages/)

Practical checklist: Decision steps before you pay points or accept credits

  1. Calculate the break‑even time precisely including PMI, escrow, and any service fees that change with rate.
  2. Confirm how many discount points each lender charges and how much rate reduction each point buys.
  3. Get multiple lender quotes and compare the long‑term total interest and APR—not just the monthly payment.
  4. Consider your time horizon: when will you sell, refinance, or exit the loan?
  5. Retain an emergency fund after closing; do not deplete reserves to buy points.
  6. Check tax treatment with your tax advisor; keep the Closing Disclosure and Form 1098.

Common misconceptions

  • Misconception: Points are always deductible. Reality: Points are deductible only under specific IRS rules; sometimes you must amortize deduction over the life of the loan (see IRS guidance).
  • Misconception: Credits always cost more. Reality: Credits suit buyers who need cash today; they may cost more over time, but can enable investments or liquidity that yield net gains for that borrower.
  • Misconception: One lender’s point schedule equals another’s. Reality: Pricing varies — shop around.

Final recommendation

If you can comfortably afford the upfront cost, plan to own the home beyond the break‑even period, and you aren’t draining your emergency fund, buying points usually yields the best long‑term savings. If you need cash for closing, to fund renovations that increase sale price, or you plan to move or refinance within the break‑even window, lender credits are often smarter.

In my experience helping dozens of buyers a year, the best results come from running the numbers for each client’s timeline and priorities — not from a rule of thumb. Use lender rate sheets, your Closing Disclosure, and the break‑even formula above to make the call.

Professional disclaimer

This article is educational and not financial or tax advice. For personalized guidance, consult a mortgage professional and a tax advisor who can review your full financial picture. FinHelp content references public resources such as the Consumer Financial Protection Bureau and IRS publications for general accuracy but cannot replace individualized counsel.

References and further reading