How Are Points Calculated on a Mortgage: Cost and Break-Even

Points on a mortgage are calculated as a percentage of your loan amount: one point equals 1% of the loan. On a $300,000 mortgage, one point costs $3,000; on a $500,000 loan, one point costs $5,000. There are two kinds. Discount points are prepaid interest that lowers your rate. Origination points are a lender processing fee that does nothing to your rate. The math is identical for both, but what you get in return, and how they’re treated at tax time, is not.

The Dollar Cost of a Point

The formula is straightforward multiplication: loan amount × 0.01 = cost of one point.¹ Two points on a $500,000 loan is $10,000. Half a point on a $400,000 loan is $2,000. Fractional amounts are allowed, which lets you tune how much you spend upfront against how much rate reduction you want.

The number people trip on: the calculation runs on the loan amount, not the home’s sale price. Buy a $400,000 home with 20% down and your loan is $320,000, so one point is $3,200, not $4,000. Points show up in your closing costs on the Closing Disclosure form you receive before settlement.²

What a Discount Point Buys You

A discount point is prepaid interest. You hand the lender a lump sum at closing, and in exchange your interest rate goes down for the life of the loan. A common benchmark is that one point cuts your rate by about 0.25 percentage points, but that number is not fixed. The actual reduction varies by lender, loan type, and market conditions.¹

Run the numbers on a 30-year fixed loan of $300,000. At 7.0% with no points, principal and interest is roughly $1,996 a month. Pay $3,000 for one point, drop the rate to 6.75%, and the payment falls to about $1,946. That’s $50 a month. Over 30 years, $50 a month totals $18,000, well above the $3,000 you spent.

One caveat on adjustable-rate mortgages: a discount point only reduces the rate during the initial fixed period. Once the loan starts adjusting, the buydown is gone. Buying points on an ARM rarely makes sense unless you were already planning to sell or refinance before the adjustment kicks in.

Points also affect your APR. Because APR spreads upfront costs across the loan term, paying points can push your disclosed APR higher even as your interest rate drops.³ When you’re comparing offers, read the interest rate and the APR together.

Figuring Out When Points Pay Off

The number that decides whether discount points are worth buying is the breakeven point: how many months of lower payments it takes to recoup what you paid upfront.

Upfront cost of points ÷ monthly payment savings = months to break even

From the earlier example, $3,000 divided by $50 a month is 60 months, or five years. Stay in the loan past month 60 and every dollar saved after that is yours. Sell or refinance before month 60 and you lost money buying the points.

The formula is a simplification. It doesn’t account for the time value of that $3,000 sitting in an investment account instead, any tax benefit from deducting the points, or a future rate drop that might make refinancing attractive before you hit breakeven. Still, it’s a reliable ballpark. Most breakeven periods fall between four and eight years. If you’re confident you’ll be in the home and the loan that long, points are worth a serious look.

Origination Points Are a Fee, Not a Rate Cut

Origination points use the same 1%-per-point math, but they cover the lender’s underwriting and funding work rather than lowering your rate. One origination point on a $400,000 loan is $4,000. You’ll find this in Section A of your Loan Estimate as “Origination Charges.”²

Origination fees are negotiable. Some lenders charge a flat dollar amount instead of a percentage, and others bake the cost into a slightly higher interest rate. Ask for an itemized breakdown. On a VA-backed loan, the lender’s origination fee is capped at 1% of the loan amount by federal regulation.⁴

Lender Credits Run the Trade in Reverse

Lender credits flip the discount-point trade. You accept a higher interest rate, and the lender gives you money toward closing costs. They’re sometimes called “negative points.”⁵

A lender might offer 7.125% instead of 7.0% and apply $675 to your closing costs in exchange. Less cash at the table, more interest over the life of the loan. Lender credits can only be applied to closing costs. They cannot go toward your down payment or other debts.⁵ The breakeven logic works here too, just inverted: figure out how many months of higher payments it takes before the credit stops being a good deal.

When the Seller Can Cover Your Points

A seller can put money toward your discount points as part of their closing cost concessions, but loan programs cap what they can contribute. For conventional loans backed by Fannie Mae, the limits are based on the lower of the sale price or appraised value:⁶

LTV above 90%: up to 3%
LTV between 75.01% and 90%: up to 6%
LTV at 75% or below: up to 9%
Investment properties: up to 2% regardless of LTV

FHA loans allow seller contributions up to 6% of the sale price toward closing costs, including points. Any concession beyond your actual closing costs is treated as a price reduction, not a credit, and seller contributions cannot be applied to your down payment.⁶

Federal Caps on Total Points and Fees

Two federal thresholds limit how much lenders can charge in total points and fees, and both were updated for 2026.⁷

For a loan to keep its Qualified Mortgage status (which carries legal protections for both the lender and the borrower), 2026 points-and-fees limits are:

Loans of $137,958 or more: 3% of the loan amount
Loans from $82,775 to $137,957: $4,139
Loans from $27,592 to $82,774: 5% of the loan amount
Loans from $17,245 to $27,591: $1,380
Loans below $17,245: 8% of the loan amount

Most home purchase loans sit in the top tier, so the 3% cap applies. On a $300,000 mortgage, total points and fees can’t exceed $9,000 without losing that status.

A stricter set of thresholds under the Home Ownership and Equity Protection Act triggers “high-cost mortgage” treatment, with extra consumer protections and lender restrictions. For 2026, a loan of $27,592 or more becomes high-cost if points and fees exceed 5% of the loan amount. For smaller loans, the trigger is the lesser of $1,380 or 8% of the loan amount.⁷

Not every discount point counts toward these caps. Under Regulation Z, up to two bona fide discount points can be excluded from the points-and-fees total if the loan’s pre-buydown interest rate doesn’t exceed the average prime offer rate by more than one percentage point.⁸

Deducting Points on Your Tax Return

Discount points are deductible as mortgage interest, but only if you itemize on Schedule A. Take the standard deduction and the benefit disappears.⁹ For 2026, the standard deduction is $16,100 for single filers and $32,200 for married couples filing jointly, so points only help at the margin if your total itemized deductions clear those amounts.¹⁰

Buy a primary home and you can generally deduct the full amount of points in the year you pay them, but the IRS applies nine tests: the loan must be secured by your main home, paying points must be an established practice locally, the amount cannot be excessive for your area, you use the cash method of accounting, the points aren’t a substitute for other fees (appraisal, title, attorney), the cash you brought to closing plus any seller-paid points was at least equal to the points charged, the loan was used to buy or build the home, points were calculated as a percentage of principal, and the amount appears clearly on your settlement statement.¹¹

Points on a second home can never be deducted in full in the year paid. They must be spread over the life of the loan.¹¹

Points paid on a refinance generally can’t be deducted in full in the year paid either, even on your main home. Instead you deduct them ratably over the loan term. Pay $3,600 in points on a 30-year refinance and you deduct $120 a year. One exception: if you use part of the refinance proceeds to make substantial improvements to your main home, the portion of points tied to that improvement spending may qualify for a full deduction in the year paid, provided you meet the first six of the nine tests.¹¹

Your lender reports the points paid in Box 6 of Form 1098, sent early in the year after your closing.¹² Keep that form with your tax records. Appraisal fees, notary fees, mortgage insurance premiums, and any points charged in place of those costs aren’t deductible as interest.⁹

1
Consumer Financial Protection Bureau. Data Spotlight: Trends in Discount Points Amid Rising Interest Rates
2
Consumer Financial Protection Bureau. Closing Disclosure Explainer
3
Consumer Financial Protection Bureau. What Is the Difference Between a Mortgage Interest Rate and an APR
4
GovInfo. 38 CFR 36.4813 – Charges and Fees
5
Consumer Financial Protection Bureau. How Should I Use Lender Credits and Points
6
Fannie Mae. Interested Party Contributions (IPCs)
7
Federal Register. Truth in Lending (Regulation Z) Annual Threshold Adjustments (Credit Cards, HOEPA, and Qualified Mortgages)
8
eCFR. 12 CFR 1026.32 – Requirements for High-Cost Mortgages
9
Internal Revenue Service. Topic No. 504, Home Mortgage Points
10
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
11
Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction
12
Internal Revenue Service. Instructions for Form 1098