A mortgage discount point is an upfront fee paid to a lender at closing in exchange for a reduced interest rate. One point costs 1% of the loan amount. On a $350,000 loan, one point costs $3,500. Depending on how long you stay in the home, this upfront payment can save you significantly more than it costs -- or cost you money you will never recover.
How Mortgage Points Work
The rate reduction offered per point varies by lender, loan type, and market conditions. The conventional rule of thumb is 0.25 percentage points of rate reduction per point paid, but in practice this can range from 0.125% to 0.375% per point. When comparing loan offers with different point structures, always compare the total cost -- not just the monthly payment or interest rate in isolation.
Example: A $350,000 loan at 6.87% for 30 years has a monthly P&I payment of $2,301. Paying one point ($3,500) to reduce the rate to 6.62% lowers the payment to $2,244 -- a savings of $57 per month.
Calculating Your Breakeven Period
The breakeven period is the number of months it takes to recoup the upfront point cost through monthly savings:
Breakeven months = Point cost / Monthly savings
In the example above: $3,500 / $57 = 61.4 months, or just over 5 years.
If you plan to stay in the home more than 5 years, buying the point is financially beneficial. If you expect to sell or refinance within 5 years, you would not recoup the upfront cost and the points would cost you money net.
Factors That Affect the Decision
How long you plan to stay: This is the most important variable. The national median tenure for homeowners has historically been 8--13 years, but individual circumstances vary enormously. If there is meaningful uncertainty about your timeline, buying points introduces risk.
Opportunity cost: The $3,500 spent on a point could be invested. In a market earning 7% annually, $3,500 invested grows to approximately $6,900 over 10 years. If the point saves you $57/month for 10 years, you save $6,840 -- roughly equal to the investment alternative. In higher-return environments, the opportunity cost of paying points increases.
Rate environment: In a declining rate environment, buying points to lock in a lower fixed rate may be less valuable if you are likely to refinance within a few years as rates fall. In a stable or rising rate environment, the value of locking in a lower rate increases.
Tax deductibility: Points paid on a primary residence purchase are generally deductible in the year paid under IRS Publication 936. Points paid on a refinance must be deducted over the loan term. Consult a tax professional to understand the deductibility of points in your specific situation.
Points vs. Lender Credits
The reverse of discount points is lender credits (sometimes called negative points). Instead of paying upfront to lower your rate, you accept a higher rate in exchange for a credit toward closing costs. This reduces your cash needed at closing but increases your monthly payment and total interest over the loan life.
Lender credits make sense when you are short on closing cost cash, plan to sell or refinance within a few years, or are investing your cash at returns that exceed the long-term cost of the higher rate. Like discount points, the decision hinges on your expected holding period.
How to Use the Calculator
Use our Mortgage Points Calculator to enter your loan amount, base rate, points being offered, and the expected rate reduction per point. The calculator shows your breakeven period, monthly savings, and total lifetime savings or cost net of the upfront payment.
Source: Consumer Financial Protection Bureau (CFPB), "What Are Mortgage Points?"; Internal Revenue Service, Publication 936: Home Mortgage Interest Deduction; Freddie Mac Primary Mortgage Market Survey (PMMS); Mortgage Bankers Association.