What Are Mortgage Points?
Mortgage points (discount points) are an upfront fee paid at closing to reduce your interest rate. One point equals 1% of the loan amount. In exchange, the lender reduces your interest rate -- typically by 0.25 percentage points per point purchased, though the actual reduction varies by lender and market conditions.
The Break-Even Calculation
The break-even point is the number of months it takes for the accumulated monthly interest savings to equal the upfront cost of the points. If your break-even is 48 months and you plan to stay in the home for 10 years, buying points is likely worthwhile. If you plan to move or refinance within 3 years, you will not recoup the cost.
When Buying Points Makes Sense
Points make the most financial sense when: you have the cash to pay them upfront without depleting reserves, you plan to stay in the home longer than the break-even period, and the rate reduction meaningfully reduces your payment on a large loan balance.
Points vs. Larger Down Payment
If choosing between buying points and making a larger down payment, the larger down payment is often the better choice. It reduces the loan principal (and all future interest), may eliminate PMI, and improves your LTV ratio. Points only reduce the rate.
Points Are Often Tax-Deductible
Discount points paid on a purchase-money mortgage for your primary residence are generally deductible in the year paid, subject to IRS rules and itemization limits. Points on a refinance are typically deducted ratably over the life of the loan instead. Consult a tax professional to confirm how points affect your specific return.
Common Mortgage Points Mistakes
Buying points on a loan you plan to refinance soon. If rates fall and you refinance before the break-even period, you never recoup the upfront cost of the points.
Assuming all lenders price points the same way. The rate reduction per point varies by lender and market conditions -- always calculate the break-even for your specific quote, not a rule of thumb.
Frequently Asked Questions
Can I negotiate the price of a point? The rate-to-price relationship is generally set by the lender's pricing sheet for the day, not individually negotiable, though shopping multiple lenders can reveal better overall pricing.
Are points the same as origination fees? No -- discount points buy down your rate, while origination fees compensate the lender for processing the loan and do not affect your rate.
The Inputs, Field by Field
Loan amount. The mortgage principal. One point costs 1% of this figure, so the dollar cost of points scales directly with how much you borrow.
Points purchased and rate reduction. How many points you are considering and how much each lowers your rate -- commonly about 0.25 percentage points per point, though it varies by lender. Use your lender's actual quote rather than a rule of thumb.
Time you expect to keep the loan. The horizon that decides whether points pay off. Points reward borrowers who stay past the break-even month and penalize those who sell or refinance early.
How to Read Your Results
The key output is the break-even month: the point at which accumulated monthly savings equal the upfront cost of the points. Compare it against how long you realistically expect to hold the loan. A 48-month break-even is attractive if you plan to stay a decade, and a poor bet if you expect to move or refinance within a few years. Weigh points against simply making a larger down payment, which cuts principal and can remove PMI rather than only trimming the rate.
Assumptions and Limitations
This calculator assumes the points buy a fixed-rate reduction held for the life of the loan and that you keep the loan unchanged. It does not model the tax treatment of points, which differs between a purchase and a refinance, nor the opportunity cost of the cash spent on points. Results are educational estimates; confirm the exact rate-to-price trade with your lender's pricing for the day.
More Frequently Asked Questions
Are discount points tax-deductible? Points on a purchase-money mortgage for a primary residence are generally deductible in the year paid, subject to IRS rules and itemization. Points on a refinance are typically deducted gradually over the life of the loan. Confirm with a tax professional.
Is buying points better than a bigger down payment? Often the larger down payment wins -- it reduces the principal and all future interest, can eliminate PMI, and improves your loan-to-value ratio, whereas points only lower the rate. Compare both against your break-even horizon.
Related Calculators and Guides
See how the bought-down rate flows into your payment with the mortgage calculator, and if you might refinance later, test the trade-off with the refinance calculator. For the wider process, read our guide to getting a mortgage and check affordability with the how much house can I afford guide.