Mortgage Discount Points
Paying a point buys a lower interest rate for money at closing. Whether that trade works comes down to one calculation: how many months of savings it takes to recover the up-front cost. This guide works that math with an illustrative example, then tests it against a larger down payment. Run your own version in the free mortgage calculator.
In short: a point costs 1% of the loan amount today and lowers the payment a little every month. It pays for itself only if the loan is held past the break-even month, which is the point cost divided by the monthly saving.
What a discount point is
A discount point is a fee paid to the lender at closing in exchange for a lower interest rate on the loan. One point equals 1% of the loan amount, so on a $350,000 loan a single point costs $3,500. Points are usually available in fractions as well, and lenders publish the rate each one buys as part of their pricing.
How much rate a point buys is not fixed. It moves with the market, the loan program, and the lender, and the same money buys more rate reduction on some days than others. That is why the only reliable way to evaluate points is to take the specific numbers on a specific offer and run the break-even, rather than relying on a rule of thumb.
A worked example
The rates below are illustrative, chosen to show the mechanics. The example is a $350,000 loan over 30 years, comparing 6.5% with no point against 6.25% bought with one point costing $3,500.
| No point | One point | |
|---|---|---|
| Rate (illustrative) | 6.5% | 6.25% |
| Paid at closing for the rate | $0 | $3,500 |
| Monthly principal and interest | $2,212.24 | $2,155.01 |
| Total interest over 30 years | $446,405.71 | $425,803.67 |
The point buys $57.23 a month. Set against its $3,500 cost, the break-even arrives at 61.2 months, or 61 months, which is 5 years 1 month. Before that month the point is behind; after it, every month is pure saving. Held the full 30 years, the lower rate saves $20,602.04 in interest, or $17,102.04 once the point itself is subtracted.
Holding period is the whole question
Nothing about a point changes based on how it feels; it changes based on how long the loan survives. Selling the home, refinancing, or paying the loan off early all end the stream of savings, and the up-front cost is not refunded.
| Held for | Payment savings so far | Net after the point |
|---|---|---|
| 3 years | $2,060.20 | -$1,439.80 |
| 5 years | $3,433.67 | -$66.33 |
| 7 years | $4,807.14 | +$1,307.14 |
| 10 years | $6,867.35 | +$3,367.35 |
| 30 years | $20,602.04 | +$17,102.04 |
At three years the position is still $1,439.80 down. At five years it is roughly level, $66.33 short of even. From year seven onward the point is ahead, by $1,307.14 at that stage and $3,367.35 at ten years. The honest version of the question is not whether points are good but whether this loan is likely to still exist in 5 years 1 month.
Fractions of a point
Points are rarely sold only in whole units. Half a point on the example loan costs $1,750.00. If it buys half the rate reduction, taking 6.5% to an illustrative 6.375%, the payment falls to $2,183.54, a saving of $28.69 a month, and the break-even lands at 61 months. That is the same crossover as the full point, because halving both sides of a division changes nothing.
Lender pricing is not always proportional, though. A first fraction sometimes buys more rate per dollar than the next one, and the schedule can move during the day. The break-even for each increment offered is worth computing separately rather than assuming the ratio holds.
What a point does not change
A point lowers the rate and nothing else. Property taxes, homeowners insurance, mortgage insurance, and any association dues sit outside it entirely, so the reduction applies only to the principal and interest slice of the monthly bill. On a payment where escrowed items are large, a point moves a smaller share of the total than the rate change suggests.
The amount owed is also nearly unchanged. After five years of payments the example loan owes $327,638.42 at 6.5% and $326,680.35 at 6.25%, a difference of $958.08. A point buys a cheaper payment, not a faster payoff, which is worth keeping distinct from an extra principal payment that does the reverse.
Points against a larger down payment
The same $3,500 could reduce the amount borrowed instead of the rate. Borrowing $346,500 at 6.5% over 30 years gives a payment of $2,190.12 and total interest of $441,941.65. The point option, $350,000 at 6.25%, gives $2,155.01 and $425,803.67.
The point wins on both counts here: $35.11 lower each month and $12,637.98 less paid across the full term. The reason is structural. A rate reduction applies to the entire balance for the entire term, while the same cash used as down payment removes only its own face value from the balance. That result depends on how much rate the point buys, so it flips whenever a point buys very little.
The comparison also assumes the smaller loan does not cross a threshold that changes anything else. Crossing into 80% loan-to-value is the case that matters most, because it is what governs private mortgage insurance on a conventional loan. Where extra cash moves the loan across that line, the mortgage insurance saving belongs in the comparison too; the PMI page covers those rules.
Lender credits: the same trade in reverse
Negative points, usually called lender credits, work the other way. The lender pays part of the closing costs and the rate goes up. The break-even logic is identical, run backwards: the credit is money now, the higher payment is the cost later, and the crossover is the credit divided by the monthly difference. Short holding periods favor credits for the same reason they disfavor points.
A note on taxes
Discount points may be deductible in some circumstances, and the treatment differs between a purchase and a refinance. The rules depend on individual filing circumstances, so a tax professional is the right source for whether any of it applies to a given situation.
Run your own numbers: enter the loan amount and rate in the mortgage calculator, note the payment, then change the rate to the quoted buy-down rate and note it again. The difference divided into the point cost is the break-even month for your loan.
Frequently asked questions
How much does one discount point cost?
One point equals 1% of the loan amount. On a $350,000 loan that is $3,500, paid at closing. Lenders often sell fractions of a point as well, priced proportionally.
How do you calculate the break-even on points?
Divide the cost of the point by the monthly payment saving it buys. In the illustrative example on this page, $3,500 divided by a $57.23 monthly saving gives 61 months, so the point is recovered after about 5 years 1 month of payments.
Are discount points worth it?
It depends entirely on how long the loan is held. Before the break-even month the point is a loss, and selling or refinancing early ends the savings without refunding the cost. Past that month it is a gain, and the gain grows for the rest of the term.
Is it better to buy points or make a bigger down payment?
In the illustrative comparison on this page the point wins, because a rate reduction applies to the whole balance for the whole term while the same cash as down payment removes only its own value. The answer reverses when a point buys very little rate, and it changes again if the extra cash moves the loan across the 80% loan-to-value line.
More mortgage guides
- Closing costs explained
- 15- vs 30-year mortgage
- When a refinance pays for itself
- Mortgage terms glossary
- How much is PMI, and how do I remove it?
This guide is general information, not financial advice. Rates and figures vary. Confirm all numbers with your lender.
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