When you get a mortgage offer, your lender may ask whether you want to “buy points” to lower your interest rate. Paying more upfront to save every month can be a smart move, or a costly mistake, depending on how long you keep the loan. In this guide, you’ll learn how mortgage points work, how much they cost, how to calculate your break-even point, and when buying them actually makes sense. You can also run your own numbers with our free calculator.
What Are Mortgage Points?
Mortgage points, also called discount points, are fees you pay your lender at closing in exchange for a lower interest rate. The IRS describes them as a form of prepaid interest. The basics:
- 1 point = 1% of your loan amount. On a $400,000 loan, one point costs $4,000.
- Each point usually lowers your rate by about 0.25%, although the exact reduction varies by lender and market conditions.
- You can often buy partial points, such as half a point or 1.5 points.
Points are optional. Lenders typically quote a rate with no points and then offer lower rates in exchange for points.
Mortgage Points Calculator
Mortgage Points Break-Even Calculator
Compares principal and interest payments only. Results are estimates and do not include taxes, insurance or the possible tax deduction for points.
How to Calculate Your Break-Even Point
The key question with mortgage points is how long it takes for your monthly savings to cover the upfront cost. The formula is simple:
Break-even point (months) = cost of points ÷ monthly savings
Example: On a $400,000, 30-year fixed loan:
| Option | Rate | Upfront cost | Monthly payment (P&I) | Monthly savings |
|---|---|---|---|---|
| No points | 7.00% | $0 | About $2,661 | — |
| 1 point | 6.75% | $4,000 | About $2,594 | About $67 |
| 2 points | 6.50% | $8,000 | About $2,528 | About $133 |
With 2 points, you pay $8,000 to save about $133 per month. Your break-even point is about 60 months, or 5 years. If you keep the loan for 30 years, the total savings would be close to $48,000, or around $40,000 after subtracting the cost of the points. But if you sell or refinance after 3 years, you’d lose money.
Rates and point pricing in this example are illustrative. Ask each lender for its own quotes, and use our mortgage calculator to compare payments.
When Mortgage Points Are Worth It
Buying mortgage points usually makes sense if:
- You plan to stay in the home for many years, well past your break-even point.
- You don’t expect to refinance soon. If rates drop and you refinance, the points you paid are lost.
- You have extra cash after covering your down payment, closing costs, and emergency fund.
- You want the lowest possible monthly payment for the long term, for example on a fixed-rate loan you intend to keep.
- The seller is paying. Sellers can sometimes contribute toward your points as part of the negotiation.
When Mortgage Points Are Not Worth It
Skip mortgage points if:
- You may move within a few years, before reaching your break-even point.
- You expect rates to fall and plan to refinance. Our guide on when to refinance explains how to judge that.
- Your cash is limited. Using savings for points instead of a bigger down payment can leave you with mortgage insurance or less money for emergencies.
- You have an adjustable-rate mortgage. On an ARM, points only lower the rate during the initial fixed period, which shortens the time to benefit. See our comparison of fixed vs adjustable-rate mortgages.
Mortgage Points vs a Larger Down Payment
If you have extra cash, you could use it for points or put it toward your down payment. A larger down payment reduces your loan balance and may help you reach 20% down and avoid PMI, which can save more than points in many cases. If you’re already at 20% down, points become more attractive. Our guide on how much down payment you need can help you compare both options.
Discount Points vs Origination Points
Not all “points” are the same:
- Discount points lower your interest rate. These are the ones this guide focuses on.
- Origination points are a lender fee for processing the loan and don’t lower your rate.
Both appear in the “Origination Charges” section of your Loan Estimate. Always check which kind you’re being charged and compare the total cost across lenders.
Lender Credits: Negative Points
Lender credits work the opposite way: you accept a slightly higher interest rate, and the lender gives you a credit to reduce your closing costs. This can make sense if you’re short on cash or expect to sell or refinance within a few years. The CFPB explains how points and lender credits compare.
Are Mortgage Points Tax Deductible?
They can be. According to the IRS, if you itemize deductions, points paid to buy your main home may be deductible in the year you pay them when certain conditions are met. Points paid on a refinance or a second home are generally deducted gradually over the life of the loan. Since most taxpayers take the standard deduction, the tax benefit may be small or nonexistent, so check with a tax professional.
Tips Before You Buy Mortgage Points
- Ask for quotes with and without points from at least three lenders on the same day, since rates change daily.
- Compare the APR, which includes the cost of points, not just the interest rate.
- Calculate your break-even point with the calculator above.
- Be realistic about how long you’ll keep the loan. Many homeowners sell or refinance within 10 years.
- Negotiate with the seller to cover some or all of the points.
A Note From José María
I’m José María, and I created Finanzasclave to explain mortgage and home-buying decisions in plain English. Mortgage points sound technical, but the decision really comes down to one question: will you keep the loan long enough to recover what you paid? That’s why I included a break-even calculator instead of a general rule. My advice is to be honest about your plans. If there’s a real chance you’ll move or refinance in the next few years, keeping that cash is usually the safer choice.
Frequently Asked Questions
How much does one mortgage point lower your rate?
Typically about 0.25%, but it varies by lender, loan type, and market conditions. Always ask for exact quotes.
Can I buy half a mortgage point?
Yes. Many lenders let you buy fractions of a point, such as 0.5 or 1.5 points.
Can I finance mortgage points?
Sometimes they can be rolled into the loan, but that increases your balance and reduces the benefit. Paying them at closing is usually better.
Are mortgage points worth it on a refinance?
They can be, but only if you’ll keep the new loan past the break-even point. Points on a refinance are generally deducted over the life of the loan for tax purposes.
Do mortgage points affect my monthly payment?
Yes. Buying points lowers your interest rate, which lowers your monthly principal and interest payment for as long as you keep the loan.
Final Thoughts
Mortgage points can save you thousands of dollars if you keep your loan for many years, but they can cost you money if you sell or refinance early. Before you buy them, calculate your break-even point, compare offers with and without points, and consider whether the cash would do more as a bigger down payment or emergency savings. With the right numbers, the decision becomes much clearer.
Disclaimer: This article and calculator are for informational purposes only and do not constitute financial or tax advice. Rates and point pricing vary by lender; confirm current terms before deciding.