US Real Estate & Mortgage Research Analyst
Published: March 30, 2026 · Updated: March 30, 2026 · 7 min read
Key Takeaways
- • One point ≈ 1% of the loan, lowering the rate by a fraction
- • Break-even = point cost ÷ monthly savings
- • Best if you stay past break-even with cash to spare
- • Weak if you will move or refinance soon
- • Points may be tax-deductible; ask a tax pro
When you get a loan estimate, the lender may offer to lower your rate in exchange for discount points paid at closing. It sounds appealing, but points only pay off if you keep the loan long enough. Here is how to decide.
What You Are Actually Buying
Each discount point typically costs about 1% of the loan amount and reduces the interest rate by a fraction of a percentage point. The exact rate reduction per point varies with the lender and the rate environment, so always compare the par rate (no points) against the discounted rate and the fee.
The Break-Even Math
Break-Even Example
• Loan amount: $300,000
• Cost of 1 point: $3,000 (1% of loan)
• Monthly payment saving: $75
• Break-even: $3,000 ÷ $75 = 40 months (~3.3 years)
If you keep the loan more than 40 months, the points save you money; if you sell or refinance sooner, they probably do not.
When Points Make Sense
- Long time horizon: You plan to stay well past break-even.
- Available cash: You can pay for points without emptying your reserves.
- High rate environment: Buying down can feel more valuable when rates are elevated.
When to Skip Points
- Short stay: You expect to move or refinance before break-even.
- Tight cash: The upfront cost hurts your down payment, reserves, or closing funds.
- Refinance likely: If rates drop, you may refinance and lose the benefit.
Compare Your Options
Our free Mortgage Payment Calculator lets you model a lower rate (and the added upfront cost) against the par-rate scenario so you can see the break-even and total interest for each. Choose based on your expected time in the home and your cash position.
Editor Update Note
This article was last reviewed and updated on March 30, 2026. The cost and rate impact of discount points vary by lender and market; always review your official loan estimate for exact figures.
Try These Free Calculators
- Mortgage Payment Calculator — Compare a discounted rate against the par rate.
Frequently Asked Questions
What are discount points on a mortgage?
A discount point is a fee you pay at closing to lower your interest rate — generally about 1% of the loan amount per point, with each point reducing the rate by a fraction of a percent (often around 0.25%, though the exact amount varies by lender and market). It is a trade of upfront cash for a lower rate over time.
How do I calculate the break-even on points?
Divide the cost of the points by the monthly payment savings they produce. For example, if points cost $3,000 and lower your payment by $75/month, your break-even is about 40 months ($3,000 ÷ $75). If you keep the loan longer than the break-even period, the points pay off.
When does buying points make sense?
Buying points tends to make sense if you plan to stay in the home well past the break-even point and you have the cash to pay for points without draining your reserves. It is less attractive if you expect to move or refinance soon, since you may not recoup the upfront cost.
Are mortgage points tax-deductible?
Points paid to buy down the rate on a primary residence are often deductible as mortgage interest, subject to IRS rules and limits, but tax treatment depends on your situation. Consult a tax professional, and remember points on a refinance are typically deducted over the life of the loan rather than all at once.
Should I use cash for points or a bigger down payment?
It depends on your goals. Points lower your rate and monthly payment; a bigger down payment lowers your loan balance, payment, and possibly PMI. Run both scenarios through a calculator and compare the long-term savings against keeping cash in reserve.