The Short Answer
A mortgage point — also called a discount point — is a fee you pay your lender at closing in exchange for a lower interest rate on your loan. One point typically costs 1% of your loan amount and lowers your rate by a set fraction (often around 0.25%, though it varies). In effect, you’re paying interest upfront to reduce the interest you’ll pay every month for the life of the loan.
In short, buying points is “paying now to save later” — and whether it’s worth it depends on how long you keep the loan.
How Mortgage Points Work
The basic deal is simple:
- One point = 1% of the loan. On a $300,000 loan, one point costs $3,000.
- Each point lowers your rate. A common figure is about 0.25% per point, but it depends on the lender and market.
- You pay points at closing. They’re part of your upfront costs.
- The savings show up monthly. A lower rate means a lower payment every month going forward.
A Simple Example
Example: On a $300,000 loan, one point costs $3,000 and lowers your rate from 6.25% to 6.0%. That drop saves you roughly $48 a month. To find your break-even point, divide the upfront cost by the monthly savings: $3,000 ÷ $48 ≈ 63 months, or about 5¼ years. If you keep the loan longer than that, the points pay off. If you sell or refinance sooner, you’d have been better off skipping them.
When Buying Points Makes Sense
- You’ll stay a long time. The longer you keep the loan past break-even, the more you save.
- You have cash to spare. Points cost money upfront that could otherwise go toward your down payment or reserves.
- You want a lower monthly payment. Points permanently reduce it for as long as you hold the loan.
Discount Points vs. Origination Points
Don’t confuse the two. Discount points lower your interest rate — that’s the kind described here. Origination points (or an origination fee) are what the lender charges to process your loan; they don’t reduce your rate. Both appear as upfront costs, so read your loan estimate carefully to see which is which.
The Bottom Line
A mortgage point is an upfront fee — usually 1% of the loan — that buys you a lower interest rate and a lower monthly payment. Whether points are worth it comes down to the break-even point: divide what they cost by your monthly savings to see how long you’d need to keep the loan to come out ahead. If you’ll stay past break-even, points can save real money; if you might move or refinance soon, they often aren’t worth it.
Frequently Asked Questions
What is a mortgage point in simple terms?
It’s a fee you pay at closing — usually 1% of your loan — to lower your interest rate. Paying points reduces your monthly payment for as long as you keep the loan.
How much does one mortgage point cost?
One point typically costs 1% of your loan amount. On a $300,000 loan, that’s $3,000, paid at closing. Lenders may let you buy fractions of a point as well.
How much does a point lower my rate?
Often around 0.25% per point, but the exact amount varies by lender and market conditions. Ask your lender for the specific rate reduction each point would buy on your loan.
How do I know if buying points is worth it?
Find the break-even point: divide the upfront cost by your monthly savings to get the number of months. If you’ll keep the loan longer than that, points pay off; if you’ll sell or refinance sooner, they usually don’t.
Are mortgage points tax-deductible?
Discount points may be deductible in some situations, but the rules are specific and depend on your circumstances. Check current IRS guidance or ask a tax professional about your own return.
What’s the difference between discount and origination points?
Discount points lower your interest rate. Origination points are a lender fee for processing the loan and don’t reduce your rate. Both are upfront costs, so check your loan estimate to tell them apart.
This article is for educational purposes only and is not financial, legal, or tax advice. Loan terms, rates, and rules vary by lender and situation. For guidance on your own mortgage, consult a qualified lender or housing counselor.