What Are Mortgage Points?
In plain English
Mortgage points (also called discount points) are fees paid directly to the lender at closing in exchange for a reduced interest rate on your mortgage. One point costs 1% of the loan amount and typically lowers the rate by 0.25%. Buying points is essentially prepaying interest to secure a lower monthly payment over the life of the loan.
How Do Mortgage Points Save You Money?
Each point you buy reduces your interest rate, lowering your monthly payment. On a $400,000 loan, one point costs $4,000 and might reduce your rate from 6.5% to 6.25%, saving roughly $65 per month. The break-even point — when cumulative savings exceed the upfront cost — is typically 5 to 7 years. Points make financial sense only if you plan to stay in the home past your break-even date.
What Is the Difference Between Discount Points and Origination Points?
Discount points reduce your interest rate and are optional — you choose how many to buy. Origination points are fees the lender charges for processing the loan and do not reduce your rate. Both appear on your Loan Estimate and closing costs disclosure. It's important to distinguish between the two when comparing lender offers.
Are Mortgage Points Tax Deductible?
Yes, in most cases. Points paid on a purchase mortgage are generally deductible in the year paid, while points on a refinance must typically be deducted over the life of the loan. The deduction applies only if you itemize and the home is your primary residence. Consult a tax professional to confirm eligibility based on your specific situation.
Frequently asked questions
How many mortgage points can you buy?
Most lenders allow you to buy up to 3 or 4 points, though the exact limit varies. There is a point of diminishing returns where additional points save less per dollar spent. Your lender can show you the rate reduction for each additional point.
Is it better to buy points or make a larger down payment?
It depends on your situation. A larger down payment reduces your loan amount and may eliminate PMI. Points reduce your rate on the remaining balance. Run both scenarios with your lender to see which saves more over your expected ownership period.
Keep exploring
Related terms
Mortgage
A mortgage is a loan used to purchase real estate, where the property itself serves as collateral. It's typically repaid over 15 or 30 years through monthly payments of principal and interest.
Closing Costs
Closing costs are the fees and expenses paid at the end of a real estate transaction, on top of the down payment. They typically range from 2% to 5% of the loan amount.
Refinancing
Refinancing replaces your existing mortgage with a new one, typically to get a lower interest rate or change loan terms. It can reduce monthly payments or help you pay off your home faster.
Loan Estimate
A Loan Estimate is a standardized three-page form that lenders must provide within three business days of receiving your mortgage application.