Discount points are an upfront fee you pay to get a lower interest rate. One point equals 1% of the loan amount. Whether they're worth it comes down to one question: will you keep the loan long enough to earn the cost back?
How Points Work
On a $400,000 loan, one point costs $4,000. How much a point lowers the rate varies by lender and by day, so always compare the actual quotes rather than assuming a fixed amount.
The opposite also exists: lender credits. You accept a slightly higher rate, and the lender gives you a credit toward closing costs.
Find Your Break-Even Point
Break-even months = cost of points ÷ monthly savings.
Example: points cost $4,000 and lower your payment by $80 a month. $4,000 ÷ $80 = 50 months, a little over four years.
If you expect to keep the loan longer than the break-even point, paying points can make sense. If you might sell or refinance sooner, you'd lose money on them.
When Points Usually Make Sense
- You plan to stay in the home and keep the loan for many years.
- You have extra cash at closing that you don't need for reserves.
- On a rental, a lower payment raises your DSCR enough to reach a better pricing tier.
When to Skip Them
- Rates may drop and you'd likely refinance.
- You might sell within a few years.
- Your cash is better used for the down payment, reserves, or repairs.
Points vs. Origination Fees
Discount points lower your rate. Origination fees pay the lender for making the loan and don't lower anything. Both show up on your Loan Estimate, so read the labels.
Mortgage Points FAQ
Are mortgage points worth it?
They're worth it if you'll keep the loan past the break-even point. If you might sell or refinance soon, they usually aren't.
How much does one point lower the rate?
It varies by lender and day. Compare actual quotes with and without points.
Are mortgage points tax-deductible?
Often on a home purchase, under IRS rules. Ask your tax professional.
In the financial industry since 2015. Licensed loan officer in Los Angeles, California. NMLS #1493724, with UTM Financial, LLC (NMLS #2591548). More about Ivan
This article is general education, not financial, tax, or legal advice. Loan guidelines vary by lender and change often. Not a commitment to lend.