Mortgage points are upfront fees you pay your lender at closing, with each point costing 1% of your loan amount. Some points buy down your interest rate for the life of the loan; others just cover the lender’s processing costs. Whether paying for the rate-reducing kind saves you money comes down to how long you keep the mortgage.
What One Point Costs
A point is always 1% of the loan amount, not the purchase price. On a $300,000 mortgage, one point is $3,000. On a $400,000 mortgage, it’s $4,000. Your down payment doesn’t enter the calculation.
Fractional points are common. Half a point on a $400,000 loan costs $2,000. Two points on the same loan would run $8,000. Because the structure is proportional, you can compare offers across any loan size using the same percentages.
Discount Points vs. Origination Fees
Lenders use the word “points” for two very different charges.
Discount points are prepaid interest. You pay the lender upfront, and in exchange your interest rate drops for the entire loan term.
Origination fees, sometimes called origination points, pay for the lender’s work on your file: underwriting, document preparation, and the rest of the overhead. They don’t change your rate.
The distinction matters in two places. On your taxes, only discount points may qualify for a deduction, because only they count as interest. In shopping for a loan, a low rate quoted with two origination points can cost more overall than a slightly higher rate with no origination charge. Compare total cost, not just the headline rate.
Origination fees typically run between 0% and 2% of the loan amount, with 1% being common. Some lenders don’t charge them at all; others roll the cost into the rate.
How Much a Discount Point Lowers Your Rate
Each discount point generally reduces the interest rate by about 0.25 percentage points. A 7.00% rate with one point might become 6.75%. Two points could bring it to 6.50%. The exact reduction varies by lender, loan program, and market conditions, and the CFPB notes the per-point reduction isn’t fixed — sometimes it’s larger, sometimes smaller. Treat 0.25% as a benchmark, not a promise.
On a fixed-rate mortgage, the lower rate lasts the full term. On a $400,000 loan at 7.00% over 30 years, the principal-and-interest payment runs about $2,661 a month. Drop to 6.75% with one point and the payment falls to roughly $2,594, saving about $67 a month.
Adjustable-rate mortgages work differently. The rate cut only applies during the initial fixed period. Once the loan starts adjusting, the lender resets the rate using a margin plus the current index, and the discount from your points no longer figures in. That shorter window makes the math on an ARM much tighter.
The Break-Even Calculation
The core question with discount points is whether you’ll keep the loan long enough to recover the upfront cost. The formula is simple: divide what you paid for the points by your monthly payment savings. The answer is the number of months you need to hold the mortgage to break even.
Example: you pay $6,000 for points and your monthly payment drops by $67. $6,000 ÷ $67 is about 90 months, or roughly seven and a half years. Sell or refinance before then and you lost money. Stay past it and every month after is savings.
When Points Make Sense
The average homeowner stays in a home about eight and a half years before selling. A break-even in five or six years works for most people. Past seven years, the bet gets risky — plans change, rates move, and homeowners refinance for all kinds of reasons.
A few rules of thumb follow from the math:
- If you plan to stay in the home for a decade or more and have cash to spare, points are often a good deal.
- If you might move within five years, buying points is a gamble.
- If paying for points means draining your emergency fund or shrinking your down payment below 20% and triggering private mortgage insurance, skip them.
Lender Credits: Points in Reverse
Lender credits work the opposite way. The lender gives you money toward closing costs and charges a higher interest rate in exchange. Some worksheets show these as “negative points.” A $1,000 credit on a $100,000 loan might appear as negative one point. The more credit you take, the higher the rate.
Credits make sense when cash at closing is tight or when you don’t expect to keep the loan long. A higher rate costs less over a short holding period, and the upfront savings are real. Hold the loan long enough, though, and the extra interest will outweigh what the credit was worth.
The Loan Estimate lays these choices side by side. One offer might include discount points with a lower rate, another lender credits with a higher rate, a third neither. The right pick depends on your timeline.
Deducting Points on Your Taxes
Discount points count as prepaid mortgage interest, so they may be deductible if you itemize. The rules split by purpose of the loan.
Purchase of a Primary Home
When you buy or build your main home, you can generally deduct the full cost of discount points in the year you pay them, provided several IRS conditions are met: the points are computed as a percentage of the loan, paying points is standard in your area, the amount is not excessive by local norms, the points appear clearly on your settlement statement, and you bring enough of your own cash to closing to cover at least the amount of the points. Points paid with money borrowed from the lender or broker don’t qualify.1Internal Revenue Service. Topic No. 504, Home Mortgage Points
If the seller pays your points, the IRS treats them as if you paid them yourself with unborrowed funds. You can deduct them, but you must reduce your home’s cost basis by the same amount.1Internal Revenue Service. Topic No. 504, Home Mortgage Points That lower basis could mean a larger taxable gain if you eventually sell above the exclusion.
Refinances
Points paid on a refinance don’t get the full first-year deduction. You spread the cost over the term of the new loan. $3,000 in points on a 30-year refinance works out to $100 a year. If you refinance again or pay off the loan early, you can deduct whatever portion of the original points you haven’t yet claimed in that final year.1Internal Revenue Service. Topic No. 504, Home Mortgage Points
Limits That Can Erase the Benefit
Two limits can shrink or eliminate the deduction. First, mortgage interest (including points) is deductible on up to $750,000 of acquisition debt, or $375,000 if married filing separately, for loans originated after December 15, 2017. Older loans use the earlier $1 million cap.2Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction
Second, the deduction only helps if you itemize. For tax year 2026, the standard deduction is $16,100 for single filers and $32,200 for married couples filing jointly.3Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 Many homeowners with a single mortgage don’t clear those thresholds, so the points deduction has no practical effect on their tax bill. Don’t let a possible tax break be the reason you buy points.
Where Points Appear at Closing
Points show up on two documents during the loan process. The Loan Estimate, delivered within three business days of your application, lists origination charges and any discount points, so you can compare offers side by side.4Consumer Financial Protection Bureau. Loan Estimate Explainer The Closing Disclosure, which you must receive at least three business days before signing, confirms the final numbers.5Consumer Financial Protection Bureau. TILA-RESPA Integrated Disclosure FAQs If the point charges moved between the two, ask why before you sign.
Points are paid as part of your total cash to close. The settlement agent collects the funds and sends them to the lender. Once documents are signed and funds disbursed, the point structure is locked in for the life of the loan. Make sure the settlement statement itemizes points separately from other fees. That itemization is both your proof of payment and what the IRS requires if you ever claim the deduction.