What Are Discount Points, and When Are They Worth Buying?

A discount point is interest you pay up front instead of over time. One point costs 1% of the loan amount — the CFPB's definition is exactly that blunt — and in exchange the lender lowers your interest rate for the life of the loan. You'll find points in Section A of your Loan Estimate, right next to the origination fee. Same page, different job: the origination fee is the lender's price for making the loan; points are an optional purchase you can take or leave. Whether to take it is a break-even problem, and it takes about five minutes to solve.

How much rate does a point buy?

There is no fixed answer, and anyone who quotes one is rounding. The CFPB says it plainly: the reduction depends on the lender, the kind of loan, and the mortgage market that week. A common rule of thumb is around a quarter of a percentage point of rate per point paid, and we'll use that below as an illustration — but the only number that matters is the one on your own Loan Estimate. Lenders publish a menu of rate-and-point combinations, and some menus are simply better deals than others. That's one more reason to collect more than one estimate.

A worked example

Take the same loan we use across these articles: a $350,000 home with 10% down, leaving a $315,000 loan over 30 years. At 6.5%, principal and interest run $1,991.01 a month.

• One point costs $3,150, paid in cash at closing.
• Suppose it buys the rate down to 6.25%. The payment drops to $1,939.51 — a saving of $51.50 a month.
• Break-even: $3,150 ÷ $51.50 ≈ 61 months. Just over five years.

Keep the loan past that point and the point keeps paying: held the full 30 years, it saves about $18,500 in interest for the $3,150 spent. But sell or refinance at year three and you've saved $1,854 of the $3,150 — you're roughly $1,300 worse off than if you'd kept the cash. That's the whole decision: the month you expect to stop holding this loan, compared against the break-even month. Run your own two payments through the mortgage calculator — once at each rate — and divide the point cost by the difference.

When points make sense — and when they don't

Points favor people who stay put. If this is a house you expect to hold for a decade at a rate you'd be happy keeping, prepaying interest at a discount is a reasonable use of spare cash. They work against you if there's a real chance you'll move, or if rates are widely expected to give you a refinancing opportunity — a refinance resets the loan, and any unrecouped point value is gone. And they should come last in line for your cash at closing: after closing costs, after a funded emergency fund, and after your down payment is where you want it. Spending down-payment money on points can shrink your equity and, under 20% down, keep you paying PMI longer — undoing the saving you just bought. One honest tell: if buying points is the only way the payment fits, the problem is the price of the house, not the rate. Check the payment against your income with the affordability calculator before shopping rate menus.

Lender credits: the same dial, turned the other way

Every lender will also quote the reverse trade: a higher rate in exchange for credits that pay part of your closing costs. The CFPB calls these lender credits — "negative points" on some worksheets. The math is the same break-even in a mirror: you're borrowing your closing costs through the rate, which wins if you sell or refinance soon and loses if you stay. Cash-tight buyers use credits; long-haul buyers consider points; most people are fine at zero.

A point is not a fee — it's a bet that you'll hold this exact loan past the break-even month. Price the bet before you place it.

Common questions

Are discount points the same as the origination fee?

No. Both appear in Section A of the Loan Estimate, but the origination fee is the lender's charge for making the loan — you can't decline it, only shop it. Points are optional. Our origination fee article covers the difference and what "normal" looks like.

Is a quarter-percent per point guaranteed?

No. It's a convention, not a rule — the actual trade varies by lender, loan type, and market conditions, and it isn't always linear: the second point often buys less rate than the first. Price the exact menu you're offered.

Are points tax-deductible?

Sometimes, under rules that change and depend on how you file, whether you itemize, and whether the loan is a purchase or a refinance. Check the current IRS rules for the year you're filing, or ask whoever does your taxes — any fixed answer written here would eventually be wrong.

This article is general information, not personalized financial advice. How we write and review articles is covered in the editorial note on our About page.