Mortgage Points
Mortgage points (discount points) let you pay upfront to permanently lower your interest rate. Learn the break-even math, when points make sense at 7% rates, and the difference between discount points and origination points.
Definition
A mortgage point (discount point) equals 1% of the loan amount paid at closing to permanently reduce the interest rate. On a $400,000 loan, 1 point = $4,000. Each point typically lowers the rate by 0.20–0.25 percentage points.
The break-even calculation
Paying points only makes sense if you keep the loan long enough to recover the upfront cost through monthly savings. The formula is simple:
Break-even months = Point cost ÷ Monthly payment saving
On a $400,000 loan (estimated break-even varies slightly by base rate):
| Starting rate | Rate with 1 point | Monthly saving | Point cost | Break-even |
|---|---|---|---|---|
| 7.50% | 7.25% | $67/mo | $4,000 | 59 months |
| 7.25% | 7.00% | $67/mo | $4,000 | 59 months |
| 7.00% | 6.75% | $68/mo | $4,000 | 59 months |
| 6.75% | 6.50% | $69/mo | $4,000 | 58 months |
At current rates, the break-even on 1 point is consistently around 5 years. If you sell, refinance, or pay off the loan before 5 years, you lose money buying points.
When to buy points — and when not to
Buy points if…
- You plan to hold the loan 7+ years
- Rates are unlikely to drop significantly (no near-term refinance)
- Your LTV is already under 80% (no PMI to eliminate first)
- You have cash beyond your down payment and emergency fund
- You want maximum payment certainty for budgeting
Skip points if…
- You might sell within 5 years
- Rates may fall and you'd refinance
- The cash could eliminate PMI by crossing a threshold
- You need the cash for reserves or moving costs
- The lender's point-to-rate trade-off is unfavorable
Points vs higher down payment
If you have extra cash, the choice is often between buying points and increasing your down payment. The down payment wins when:
- You are near a PMI elimination threshold (80%, 90%, 95% LTV). Eliminating PMI typically saves more per month than buying down the rate by 0.25%.
- A larger down payment improves your LTV enough to unlock a better rate tier — often more valuable than one purchased point.
- You need the mortgage insurance context: for Canadian CMHC-insured loans, a larger down payment can drop you into a lower premium bracket (e.g., 9.99% → 10% down reduces the premium from 3.10% to 2.80%).
Common questions
How much does 1 point lower my rate?
Typically 0.20–0.25 percentage points per discount point, though this varies by lender, loan type, and market conditions. At 7.25%, buying 1 point ($4,000 on a $400K loan) might reduce your rate to 7.00%. The actual rate reduction depends on the lender's point-to-rate trade-off, which changes with market volatility. Always ask your lender for the specific rate reduction per point at the time of rate lock.
Are mortgage points tax deductible?
Yes — discount points paid on a purchase mortgage are generally fully deductible in the year paid if you itemize deductions, under IRS Topic 504. Points paid on a refinance must be deducted over the life of the loan (amortized), not all in year one. Points paid by the seller on your behalf are also deductible by the buyer. Consult a tax professional — the deductibility rules have nuances around what counts as points vs fees.
What is the break-even on buying points at 7% rates?
At 7.25% on a $400,000 loan, buying 1 point ($4,000) to get 7.00% saves $67/month in payment ($2,674 vs $2,741). Break-even: $4,000 ÷ $67 = 59.7 months (~5 years). If you sell or refinance before 5 years, points were a net loss. If rates fall and you refinance, you give up the rate reduction you paid for. The CFPB Loan Estimate includes an "In 5 Years" comparison to help evaluate this.
What is the difference between discount points and origination points?
Discount points are optional — you choose to pay them to buy down your rate. Origination points (or origination fees) are compensation the lender charges for processing the loan — they do not reduce your rate. Both are expressed as percentages of the loan amount and both appear on your Loan Estimate in Section A of closing costs. Read carefully: origination points inflate the cost without improving your rate.
Should I buy points or put more money toward the down payment?
If your LTV is at or near a PMI threshold (80%, 90%, 95%), the extra cash is usually better applied to the down payment to cross that threshold and eliminate PMI. Once you are past PMI thresholds, buying points becomes a more useful comparison — especially for buyers who plan to stay 7+ years. At 20% down with no PMI concern, the break-even on points at 7% rates is typically 4–6 years, making points worthwhile for long-term holders.