What Is Mortgage Points?
Mortgage points are upfront fees paid at closing to change the terms of a loan. Discount points buy down the interest rate — each point costs 1% of the loan amount and typically reduces the rate by 0.25%. Origination points cover the lender's processing costs. Points are a trade-off: pay more upfront to save on monthly payments, with a break-even period typically between 4 and 7 years.
Key Facts
- One discount point costs 1% of the loan amount ($3,500 on a $350,000 mortgage) and typically reduces the interest rate by 0.25 percentage points
- At current 7%+ mortgage rates, buying 2 points on a $350,000 loan costs $7,000 upfront but saves roughly $120/month — a break-even of about 58 months (under 5 years)
- Points are generally tax-deductible in the year paid for a home purchase, but must be amortized over the loan term for a refinance (IRS Publication 936)
- The break-even calculation assumes the borrower keeps the loan — refinancing or selling before the break-even point means the upfront cost was wasted
- Lender credits (negative points) work in reverse: the lender pays closing costs in exchange for a higher interest rate, increasing monthly payments but reducing upfront cash needed
What Are Discount Points vs. Origination Points?
There are two types of mortgage points, and they serve completely different purposes:
- Discount points: A prepaid interest payment that buys a lower interest rate. Each point costs 1% of the loan amount. The rate reduction per point varies by lender and market conditions but typically falls between 0.125% and 0.375%. Discount points are optional — the borrower chooses whether the upfront cost is worth the monthly savings.
- Origination points (origination fee): A fee charged by the lender to cover loan processing, underwriting, and administrative costs. Typically 0.5% to 1.0% of the loan amount. Unlike discount points, origination fees don't reduce the interest rate — they're simply a cost of obtaining the loan. Some lenders charge a flat origination fee instead of points.
The Loan Estimate form (which replaced the Good Faith Estimate in 2015) separates these clearly: discount points appear in Section A as optional charges, while origination fees appear as lender charges. Borrowers should compare the total cost of each option, not just the interest rate.
How Does the Break-Even Calculation Work?
The break-even period determines when buying points becomes worthwhile. The math is straightforward:
Break-even months = Point cost ÷ Monthly savings
Example on a $350,000 loan:
- No points: 7.00% rate, $2,329/month payment
- 1 point ($3,500): 6.75% rate, $2,270/month payment — saves $59/month, break-even at 59 months (~5 years)
- 2 points ($7,000): 6.50% rate, $2,212/month payment — saves $117/month, break-even at 60 months (~5 years)
If you plan to stay in the home and keep the mortgage for longer than the break-even period, buying points saves money. If you expect to sell, refinance, or pay off the loan sooner, points are a losing proposition.
When Do Points Make Sense?
Points are most beneficial when:
- You plan to stay long-term: The longer you hold the mortgage, the more you save after break-even
- You have cash available: Points require upfront cash that could otherwise go toward a larger down payment (which might eliminate PMI — a separate cost savings)
- Rates are high: In a high-rate environment, the absolute dollar savings per point are larger
- You're in a high tax bracket: The tax deductibility of points increases the effective return
Points are generally a poor choice when rates are expected to decline (you'd refinance and lose the benefit), when you might sell within 5 years, or when the upfront cash would be better used to avoid PMI or build an emergency fund.
What Are Lender Credits (Negative Points)?
Lender credits are the opposite of discount points. The lender offers to cover some or all closing costs in exchange for a higher interest rate. This reduces upfront cash requirements but increases the monthly payment and total interest paid over the life of the loan. Lender credits can make sense for borrowers who are cash-constrained or plan to refinance soon — they minimize closing costs on a loan they don't plan to keep long.
Frequently Asked Questions
Are mortgage points worth buying?
It depends on how long you'll keep the loan. Calculate the break-even period: divide the upfront cost by the monthly savings. If you'll stay past break-even (typically 4-7 years), points save money. If you might sell, refinance, or pay off the loan sooner, skip points and keep your cash.
Are mortgage points tax-deductible?
Discount points on a home purchase are generally deductible in the year paid. Points on a refinance must be deducted over the life of the loan. Origination fees are generally not deductible. See IRS Publication 936 for current rules, and consult a tax professional.
How many points should I buy?
Most borrowers buy 0 to 2 points. Beyond 2 points, the rate reduction per additional point typically diminishes, and the break-even period gets longer. Compare scenarios with 0, 1, and 2 points to find the sweet spot for your situation and timeline.
What is the difference between discount points and origination fees?
Discount points are optional — they buy a lower interest rate. Origination fees are the lender's charge for processing the loan. Both cost 1% of the loan amount per point, but only discount points reduce your rate. Your Loan Estimate form separates these so you can compare.
Can I negotiate mortgage points?
Yes. Both the interest rate and points are negotiable. Some lenders offer lower rates with more points, or higher rates with fewer points (or lender credits). Always compare the total cost of the loan — rate, points, and fees combined — across multiple lenders.