What Is a Discount Point and How Does It Work?

Discount points are an upfront fee you pay your mortgage lender at closing to permanently lower the interest rate on your loan. One point costs 1% of the loan amount and typically shaves somewhere between 0.125% and 0.25% off your rate, though the exact reduction depends on the lender, the loan type, and market conditions.¹ Because points are essentially prepaid interest, they only pay off if you keep the mortgage long enough for the monthly savings to exceed what you handed over at closing.

What a Point Costs and How Much It Lowers Your Rate

One point is 1% of your mortgage loan amount, not the home’s purchase price. On a $300,000 mortgage, one point is $3,000. On a $500,000 mortgage, it’s $5,000. You can buy fractional points as well — 0.5, 0.125, or 1.375 — so the cost scales to whatever rate reduction you’re after.¹

The rate cut you get per point isn’t fixed. A common range is 0.125% to 0.25%. Freddie Mac gives the example of one point taking a 6.25% rate down to about 6%, but your lender’s pricing could look different.² Ask each lender for the actual rate-and-point combinations they’ll offer instead of assuming a standard reduction.

The reduction is permanent. It applies for the full 15- or 30-year term of the loan, which is what separates discount points from a temporary buydown like a 2-1, where the rate only stays lowered for the first two years before reverting.³

The Break-Even Calculation

Before buying points, work out how long it takes for your monthly savings to cover the upfront cost. Divide the total cost of the points by the monthly payment reduction. If one point costs $4,000 and drops your payment by $70, break-even is roughly 57 months, or just under five years. Every month past that is money in your pocket.

The calculation only works if you actually keep the same mortgage for the entire break-even period. Selling the home, refinancing, or paying the loan off early all reset the clock. The average homeowner moves or refinances every seven to ten years, so a break-even of three or four years is a comfortable bet and one that stretches past seven is a risky one.

Factor in opportunity cost too. The $4,000 you spent on points could have gone into repairs, an emergency fund, or an investment. If break-even is long and that cash would do more work elsewhere, points may not be worth it even if you plan to stay in the home.

The Money Is Not Refundable

Once you pay for points at closing, that money is gone. Sell the home two years later, or refinance into a better rate, and you don’t get a prorated refund of what you paid. This is the biggest risk with points: it’s an irreversible upfront bet that you’ll hold the loan long enough to earn the cost back through lower payments. If life changes and you move or refinance early, you’ve spent money you can’t recover.

One tax-side wrinkle softens this slightly on refinances. If you paid points on a refi and were amortizing the deduction across the loan term, you can deduct whatever unamortized balance remains in the year you pay that mortgage off. The exception: if you refinance again with the same lender, the remaining balance rolls into the new loan’s term instead.⁴

When the Tax Deduction Actually Helps

The IRS treats discount points as prepaid mortgage interest, which means they can be deductible, but only if you itemize on Schedule A of Form 1040.⁵

Purchase vs. Refinance

On a primary residence purchase, you can generally deduct the full amount of the points in the year you pay them. The IRS requires several conditions: the points must be computed as a percentage of the loan principal, shown clearly on your settlement statement, paid with funds you didn’t borrow from the lender, and consistent with what’s customarily charged in your area. The loan also has to be secured by your primary residence.⁵ Your lender reports the amount in Box 6 of Form 1098.

Points paid on a refinance are treated differently. You have to spread the deduction ratably over the full term of the new loan. Pay $6,000 in points on a 30-year refi and you deduct $200 a year for 30 years.⁵ The same rule applies to points on a loan secured by a second home.

The Itemization Hurdle

Many borrowers never see any tax benefit from points because they don’t itemize. Your total itemized deductions have to exceed the standard deduction to matter, and for 2026 the standard deduction is $32,200 for married couples filing jointly, $16,100 for single filers, and $24,150 for heads of household.⁶ If your mortgage interest, points, state and local taxes, and other itemizable expenses don’t clear that bar, the deduction has no tax value. That’s common for borrowers with smaller mortgages.

The $750,000 Debt Cap

Even if you do itemize, points are only deductible on mortgage debt up to $750,000 ($375,000 if married filing separately). This cap, originally set by the Tax Cuts and Jobs Act for mortgages taken out after December 15, 2017, has been made permanent. Older mortgages taken out before that date follow the earlier $1 million cap.⁴ If your loan is above the applicable limit, you can only deduct the portion of the points allocable to debt within the cap.

Points vs. Lender Credits

Lender credits are the mirror image of points. Instead of paying cash upfront to lower your rate, you accept a slightly higher rate in exchange for a credit that reduces your closing costs. Sometimes they’re called “negative points.” A one-point credit on a $300,000 loan puts $3,000 toward closing costs and raises your rate for the life of the loan.¹

Lender credits make sense when you expect to move or refinance within a few years, before the higher rate can outweigh the upfront savings. Points make sense when you plan to stay put for a long time. Most lenders let you land anywhere along that spectrum.

When Buying Points Makes Sense

Points reward patience. They work best when you plan to keep the mortgage well past the break-even period, when the cash at closing won’t leave you stretched, and when you’ll actually benefit from the itemized deduction. Someone taking out a 30-year fixed mortgage and planning to stay 15 or 20 years is the classic case where points pay off; the cumulative savings can reach tens of thousands of dollars.

They’re a poor fit when your timeline is uncertain, the cash would do more good elsewhere, or your itemized deductions won’t clear the standard deduction. In those situations, lender credits or the market rate with no points is usually the safer choice. Run the break-even math with your actual loan numbers before you decide.

1
Consumer Financial Protection Bureau. How Should I Use Lender Credits and Points (Also Called Discount Points)?
2
My Home by Freddie Mac. What You Need to Know About Discount Points
3
U.S. Department of Veterans Affairs. Temporary Buydowns – VA Home Loans
4
Internal Revenue Service. Publication 936 (2025), Home Mortgage Interest Deduction
5
Internal Revenue Service. Topic No. 504, Home Mortgage Points
6
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026, Including Amendments From the One, Big, Beautiful Bill