What Are Discount Points?

Discount points are fees you pay at closing to lower your mortgage interest rate. One point costs 1% of your loan amount, so one point on a $350,000 loan is $3,500. How much each point lowers your rate depends on the lender, the loan type, and the market. They pay off only if you keep the loan past break-even.

Here’s how to find that month. Say one point costs $3,500 and your lender’s quote shows it cuts your principal-and-interest payment by $58 a month. Divide $3,500 by $58 and you get about 60 months. Keep the loan longer than 5 years and the point saves you money. Sell or refinance sooner and you lose part of what you paid. Your real numbers are on your Loan Estimate, where points show up on page 2, Section A.

If you’re not sure how long you’ll keep the loan, ask the same lender for two quotes, one with points and one without, and compare the total cost over the shortest, longest, and most likely time you’ll hold it. Sellers can also pay for points as part of a concession. See how seller concessions can fund a rate buydown.

Key Facts

• Cost per point: 1% of the loan amount
• Rate reduction per point: Varies by lender, loan type, and market, so ask for it in writing
• Break-even: Cost of the points divided by the monthly savings equals months to break even
• Where to find them: Page 2, Section A of your Loan Estimate and Closing Disclosure
• Taxes: Points on a loan to buy your main home may be deductible in the year you pay them if you itemize and meet IRS rules. Points on a refinance are generally deducted over the life of the loan (IRS Topic 504). Check with a tax professional.

Frequently Asked Questions

How many discount points can you buy?

It’s up to the lender. Points don’t have to be whole numbers, so you can buy half a point or less. Ask for pricing at a few levels and check the break-even on each one before paying for more than one point.

Are discount points worth it if you might refinance?

Usually not. If you refinance before your break-even month, you paid for savings you never collected. Points make the most sense when you’re confident you’ll keep the loan well past break-even.

What’s the difference between discount points and lender credits?

They work in opposite directions. With points, you pay more at closing for a lower rate. With lender credits, you take a higher rate and the lender covers part of your closing costs.