What Are Points in Real Estate? Costs, Break-Even, and Tax Deductions

In a real estate transaction, points are upfront fees you pay your lender at closing, with one point equal to one percent of the loan amount. On a $300,000 mortgage, one point costs $3,000. Points come in two forms: discount points, which buy down your interest rate, and origination points, which pay the lender for processing the loan. Whether they are worth paying depends on how long you plan to keep the mortgage and whether you itemize on your federal tax return.

Discount Points Versus Origination Points

Discount points are prepaid interest. You hand the lender money at closing, and in exchange the lender lowers the interest rate on your loan. Each point typically reduces your rate by about 0.25 percentage points, so paying one point might drop a 6.50% rate to 6.25%.¹ The exact reduction varies by lender and market, so ask for the specific numbers when you compare quotes.

Origination points, sometimes called origination fees, are different. They pay the lender for reviewing your credit, verifying income, underwriting the loan, and processing paperwork.² They do not lower your rate. For tax purposes, the IRS treats a loan origination fee the same as discount points if it is computed as a percentage of the loan amount and meets the other deduction rules.³

Lender Credits Work in Reverse

If discount points are money you pay to get a lower rate, lender credits are the opposite: you accept a higher rate, and the lender gives you money toward closing costs.¹ You may see these listed as negative points on a lender’s worksheet. For example, agreeing to 5.125% instead of 5.00% might bring a $675 credit toward closing costs, at the price of a slightly higher monthly payment for as long as you hold the loan. Credits can help if cash at closing is tight or you do not expect to keep the mortgage long.

How Much Do Points Cost in Dollars?

A point is always one percent of the loan amount, not the purchase price.¹ Since your loan equals the purchase price minus your down payment, the two numbers are not the same.

On a $200,000 loan, one point costs $2,000 and two points cost $4,000.
On a $300,000 loan, one point costs $3,000 and two points cost $6,000.
On a $400,000 loan, one point costs $4,000 and two points cost $8,000.

Fractional points are common. Half a point on a $300,000 mortgage would run $1,500. Both the number of points offered and the rate reduction per point vary from lender to lender, so line up written quotes and compare them side by side.

Are Points Worth It? The Break-Even Calculation

The question that matters for discount points is how long it takes for the monthly savings to repay what you spent up front. Divide the total point cost by your monthly payment savings, and the result is the number of months to break even.

Say you pay $3,000 for one point, and it lowers your monthly payment by $48. Divide $3,000 by $48 and you get about 63 months, or a little over five years. Keep the loan longer than that and you come out ahead. Sell or refinance sooner and you lose money on the trade.

Two caveats. The straight break-even math ignores the tax deduction you might claim on points, which can shorten the payback slightly if you itemize. It also ignores what you could earn by investing that upfront cash somewhere else. Run the numbers both ways before deciding.

Where Points Show Up in Your Closing Documents

Your lender must send a Loan Estimate within three business days of receiving your application.⁴ That form lays out your rate, monthly payment, and closing costs, including any points.⁵ Lender credits appear as a negative number on the same form.

Before closing you receive a Closing Disclosure with the final figures. Points and lender credits show up in Section J on page 2 of both the Loan Estimate and the Closing Disclosure.¹ If the amounts do not match what your lender quoted, ask for an explanation before you sign.

Seller-Paid Points

Sellers sometimes agree to pay some or all of the buyer’s points as part of the deal. The IRS treats seller-paid points as if the buyer paid them, so the buyer can potentially deduct them, but the buyer must reduce the home’s cost basis by the amount the seller contributed.⁶ A lower basis can mean a larger taxable gain if you eventually sell at a profit.

Seller contributions toward closing costs, including points, are also capped. For conforming loans, Fannie Mae limits an interested party’s contribution based on the loan-to-value ratio, with tighter caps as the LTV rises and a 2% ceiling on investment properties regardless of LTV.⁷ Anything above the limit is treated as a sales concession and knocked off the property’s value for underwriting.

Deducting Points on Your Taxes

The IRS treats points as prepaid mortgage interest, which puts them under the qualified residence interest deduction.³⁸ Whether you deduct them all at once or spread them over the life of the loan depends on the circumstances.

Full Deduction in the Year You Pay

You can deduct the full amount of points in the year paid only if every one of these is true:⁶

The loan is used to buy, build, or substantially improve your primary residence, and that residence secures the loan.
Paying points is an established practice in your area.
The points you paid are not more than what is typically charged locally.
You use the cash method of accounting, which most individual taxpayers do.
The points were not charged in place of items normally listed separately, such as appraisal fees, title fees, attorney fees, or property taxes.
The funds you brought to closing (down payment, escrow deposit, earnest money) were at least equal to the points charged, and you did not borrow those funds from the lender or broker.
The points were computed as a percentage of the mortgage principal and are clearly shown as points on the settlement statement.

Points on a home improvement loan secured by your main home can also qualify for the full deduction if they meet the same tests.³

Spreading Points Over the Life of the Loan

If the points do not meet every requirement above, you deduct them evenly over the loan term. This is the usual outcome in two situations:

Points paid to refinance are generally spread over the new loan’s term rather than deducted the year paid.³
Points on a loan secured by a second home cannot be fully deducted in the year paid.³

Example: $3,000 in points on a 30-year refinance works out to $100 a year in deductible interest. You can always choose to spread points over the loan term even if you qualify for the full-year deduction.

What Happens If You Pay Off Early

If you are amortizing points and the mortgage ends early through prepayment, sale, or foreclosure, you can deduct the entire remaining balance in the year the loan ends.³ If you had claimed $2,200 of a $3,000 points balance and paid off the loan, the remaining $800 goes on that year’s return.

There is one exception. If you refinance with the same lender, you cannot deduct the unamortized balance all at once. It gets added to any points paid on the new loan and spread over the new loan’s term.³

You Have to Itemize

Points are only deductible if you itemize on Schedule A.⁶ Take the standard deduction and you get no tax benefit at all from paying points. For 2026, the standard deduction is $16,100 for single filers, $32,200 for married couples filing jointly, and $24,150 for heads of household.⁹ If your mortgage interest, points, state and local taxes, and charitable contributions do not add up to more than those numbers, itemizing will not help. There are also caps on how much mortgage debt qualifies for interest deductions in the first place: $750,000 for loans taken out after December 15, 2017 ($375,000 if married filing separately), and $1,000,000 for older loans ($500,000 if married filing separately).³ Points tied to debt above the applicable cap are not fully deductible.

1
Consumer Financial Protection Bureau. How Should I Use Lender Credits and Points (Also Called Discount Points)?
2
Consumer Financial Protection Bureau. What Costs Come With Taking Out a Mortgage?
3
Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction
4
Consumer Financial Protection Bureau. I Never Received a Loan Estimate. What Can I Do?
5
Consumer Financial Protection Bureau. Loan Estimate Explainer
6
Internal Revenue Service. Topic No. 504, Home Mortgage Points
7
Fannie Mae. Interested Party Contributions (IPCs)
8
Office of the Law Revision Counsel. 26 U.S. Code 163 – Interest
9
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026