What Are Mortgage Discount Points?
A mortgage discount point is prepaid interest paid at closing that permanently reduces your interest rate. One point equals 1% of the loan amount. On a $400,000 loan, one point costs $4,000. Each point typically reduces the interest rate by 0.20%–0.30% — most commonly 0.25% — though the actual reduction varies by lender, loan program, and market conditions.
Discount points are different from origination points (lender fees for processing the loan). Origination points don't reduce your rate — they're purely a closing cost. When evaluating lender quotes, look at the Loan Estimate and distinguish between Section A (lender charges) and discount points specifically.
The Break-Even Calculation
The math on points is straightforward:
- Cost of points: Number of points × 1% × loan amount
- Monthly savings: Monthly payment without points − monthly payment with points
- Break-even month: Cost of points ÷ monthly savings
Worked Example: 1 Point on a $400,000 Loan
| Scenario | Rate | Monthly Pmt | Upfront Cost |
|---|---|---|---|
| No points (baseline) | 6.800% | $2,608 | $0 |
| 1 point | 6.550% | $2,540 | $4,000 |
| 2 points | 6.300% | $2,473 | $8,000 |
| 3 points | 6.050% | $2,407 | $12,000 |
At 1 point: monthly savings = $2,608 − $2,540 = $68/month. Break-even = $4,000 ÷ $68 = 59 months (~5 years).
At 2 points: monthly savings = $2,608 − $2,473 = $135/month. Break-even = $8,000 ÷ $135 = 59 months (~5 years).
At 3 points: monthly savings = $2,608 − $2,407 = $201/month. Break-even = $12,000 ÷ $201 = 60 months (~5 years).
In this example, all three point options break even at roughly the same time — about 5 years — because the rate reduction per point is constant. The total savings over 10 years differ: 1 point nets $68 × 120 − $4,000 = $4,160 extra; 3 points nets $201 × 120 − $12,000 = $12,120 extra.
The Refinancing Wildcard
The biggest risk with buying points is refinancing before break-even. If you buy 2 points with a 5-year break-even and refinance in year 3, you paid $8,000 upfront but only recouped $4,860 ($135 × 36 months) — a net loss of $3,140.
Points vs. Larger Down Payment
The same cash that buys points could go toward a larger down payment. Consider two alternatives for $8,000:
- 2 discount points: Rate drops 0.50%, payment drops $135/month, break-even in 5 years.
- Additional down payment: Loan amount drops by $8,000, payment drops by approximately $53/month, and permanently reduces the loan balance — no break-even required since you own more equity immediately.
For buyers at less than 20% down: additional down payment is usually superior because it either eliminates PMI (if it pushes you above 20%) or at minimum reduces the loan amount and PMI cost. PMI on a $400,000 loan at 1% runs $333/month — eliminating that outperforms almost any point-buying strategy.
For buyers already at 20%+ down: the point comparison depends on your break-even expectations. Points produce a guaranteed return (break-even); down payment produces a guaranteed but lower monthly reduction. If you expect to hold the loan 10+ years and rates won't drop materially, points may produce a better effective return.
Are Points Tax Deductible?
Yes, in most situations. Points paid on a home purchase mortgage (not refinance) are typically deductible in full in the year paid, provided you itemize deductions and meet the IRS criteria: the loan is secured by your primary residence, paying points is established practice in your area, you didn't borrow the funds to pay points from the lender, and the points are computed as a percentage of the loan principal.
The deduction is most valuable if you're in the 22%–37% federal tax bracket and itemize deductions. At a 22% federal rate, a $4,000 point payment costs an effective $3,120 after the deduction — the break-even calculation should use the after-tax cost for accuracy.
Points paid on a refinance must be deducted ratably over the loan term (not all in year one). Consult a tax professional for your specific situation.
How to Shop Points Across Lenders
Rate and point combinations are directly comparable across lenders using the APR — the annual percentage rate — which factors in points into the true annualized cost of the loan. On a Loan Estimate, Section A shows lender fees including discount points. To compare apples-to-apples:
- Apply to 3+ lenders on the same day (rate shopping within 14–45 days typically counts as one credit inquiry).
- Compare Loan Estimates received within 3 business days.
- For each lender, note the rate and total lender fees (Section A). Calculate the break-even for each scenario.
- Choose the combination that fits your expected time horizon, not just the lowest rate.
Quick Decision Framework
Buy points if: You plan to stay in the home (and keep the loan) past the break-even month, refinancing in the next 5+ years is unlikely, you have sufficient cash reserves after the down payment and closing costs, and you're in a higher tax bracket (the deduction makes points more valuable).
Skip points if: You expect to sell or refinance before break-even, you're below 20% down (use the cash to reach 20% or reduce PMI), you have a short time horizon (first home, job move likely), or rates are expected to drop soon (making refinancing imminent).
The mortgage points calculator shows your specific break-even for 0–3 points with a side-by-side comparison and a recommendation based on your expected stay. Pair it with the home affordability calculator to see how the rate reduction from points affects your maximum qualifying home price, and the closing cost calculator to see total cash due at closing including any points you buy.