What Is a Mortgage Point?

A mortgage point is a fee equal to 1% of your loan amount, paid upfront at closing. One point on a $400,000 loan costs $4,000. Points are used in two distinct ways in mortgage lending: as discount points, which reduce your interest rate, and as origination points, which compensate the lender for processing your loan. Understanding the difference — and knowing how to calculate whether paying points is worth it — can save you thousands of dollars over the life of your mortgage.

Discount Points vs. Origination Points

These two types of points are often confused, but they serve very different purposes:

• Discount points are a form of prepaid interest. You pay more at closing in exchange for a lower interest rate on your loan. Each point you buy "discounts" your rate, reducing your monthly payment for the entire loan term. These are the points most people are referring to when they talk about "buying down the rate."
• Origination points are a lender fee for originating (processing and underwriting) your loan. They are part of the lender's compensation and do not reduce your interest rate. Origination points are a cost you pay regardless of whether you also choose to buy discount points. Always confirm whether points quoted on a Loan Estimate are discount points, origination points, or both.

How Much Does One Discount Point Reduce the Rate?

There is no universal answer — the rate reduction per point varies by lender, loan type, market conditions, and loan term. As a general rule of thumb, one discount point typically reduces your interest rate by 0.20% to 0.25% (20–25 basis points). In some rate environments the benefit can be higher or lower. Always ask your lender for the exact rate/point tradeoff before deciding.

Break-Even Analysis: Is Buying Points Worth It?

The central question with discount points is how long you need to stay in the home to recoup the upfront cost through lower monthly payments. This is called the break-even point.

Example: $400,000 loan at 7.00%. You can buy 1 point ($4,000) to reduce your rate to 6.75%.

• Monthly payment at 7.00%: $2,661
• Monthly payment at 6.75%: $2,594
• Monthly savings: $67
• Break-even: $4,000 ÷ $67 = approximately 60 months (5 years)

If you plan to stay in the home — or keep the loan without refinancing — for more than 5 years, the point pays for itself and then saves you money every month thereafter. If you expect to sell or refinance sooner, the upfront cost is not recovered.

Points at a Glance: $400,000 Loan

The table below illustrates the cost and savings tradeoff at different point levels, assuming a base rate of 7.00% and a rate reduction of 0.25% per point:

Note that the break-even period tends to be similar across point levels because both cost and savings scale proportionally. The benefit of buying more points is the compounding monthly savings over many years, not a shorter break-even.

When Buying Points Makes Sense

• Long-term homeowners: If you plan to stay in the home well beyond the break-even period, discount points can deliver meaningful lifetime savings.
• Locked-in low rate environment: If current rates are favorable and you want to lock in the lowest possible payment for a 30-year term, points can secure a rate you could not otherwise access without refinancing later.
• Tax deductibility: Discount points paid on the purchase of a primary residence are generally deductible in the year paid under IRS rules, though tax laws vary and you should consult a tax professional. This deductibility improves the effective return on the points you buy.
• You have the cash: Points only make financial sense if you are not depleting savings you might need for maintenance, emergencies, or other closing costs.

Negative Points: Lender Credits

Points also work in reverse. Instead of paying more at closing to get a lower rate, you can accept a higher interest rate in exchange for a lender credit — cash that offsets your closing costs. This is sometimes called "negative points." For example, you might accept a rate 0.25% higher than the par rate in exchange for a $4,000 credit applied to your closing costs. This is useful if you are short on cash at closing, plan to refinance within a few years, or want to preserve liquidity. The tradeoff is a permanently higher monthly payment, which costs more over a long hold period.

Use the Mortgage Points Calculator to model your specific break-even for any rate/point combination your lender offers. For context on how points interact with your loan balance over time, see What Is Amortization? and What Is Loan-to-Value Ratio?

Source: CFPB — What are discount points and lender credits and how do they work?

This definition is for informational purposes only and does not constitute financial advice.