Mortgage discount points are upfront fees paid at closing to lower your interest rate—one discount point equals 100 basis points, or 1% of the loan amount—typically reducing your rate by 0.25%. They make financial sense if you plan to stay in the home long enough to reach the breakeven point, often around five years. This guide explains when discount points are worth it, offers real-life savings examples, and helps you evaluate long-term benefits versus short-term costs.
What Are Mortgage Discount Points?
Discount points, also known as mortgage points, are an optional upfront fee you pay at closing to reduce your loan’s interest rate.
Quick Facts:
- 1 discount point = 1% of the loan amount
- Typically reduces your interest rate by 0.25% per point
- Applied at loan origination
- May be tax-deductible under certain conditions
For example, on a $300,000 mortgage, 1 point would cost $3,000 and may reduce your rate from 7% to 6.75%.
By paying this fee upfront, you lock in a lower interest rate for the life of the loan, resulting in smaller monthly payments.
How Discount Points Work: A Numerical Example
Let’s illustrate how this actually impacts your loan.
Scenario:
- Loan Amount: $300,000
- Loan Term: 30 years fixed
- Interest Rate Without Points: 7.00%
- Interest Rate With 1 Point: 6.75%
- Cost of 1 Point: $3,000
Detail |
Without Points |
With 1 Point |
| Monthly Payment (PI) | $1,996 | $1,946 |
| Monthly Savings | — | $50 |
| Total Savings (Year 1) | — | $600 |
| Breakeven Period | — | 60 months |
| 10-Year Savings | — | $3,000 (net) |
| 30-Year Savings | — | ~$15,000 |
Breakeven Point:
You’d need to stay in the home or hold the mortgage for at least 5 years to recoup the cost of the point.
When Are Discount Points a Good Idea?
Discount points make sense when long-term savings outweigh the short-term costs.
Ideal Situations:
- You plan to stay in the home for at least 5–10 years
- You’re locking in a fixed-rate mortgage
- You want to reduce your monthly payment
- You have enough funds at closing to absorb the extra cost
Situations to Avoid Points:
- You’ll likely sell or refinance in a few years
- You’re choosing an ARM (adjustable-rate mortgage) with a short fixed period
- You’re cash-strapped at closing
- Your goal is short-term ownership or rapid equity building
How to Calculate the Breakeven Point
The breakeven point tells you how long it will take to recover the cost of the points through monthly savings.
Formula:
Breakeven (months) = Cost of Points ÷ Monthly Savings
Using the example above:
- $3,000 ÷ $50 = 60 months (5 years)
After the breakeven period, every dollar saved becomes a net benefit.
Strategic Considerations by Buyer Type
First-Time Homebuyers
- Pros: Lower payments help with affordability.
- Cons: Might move or refinance sooner than breakeven.
- Tip: Ask the lender to present loan options with and without points side by side.
Seasoned Real Estate Investors
- Pros: Reduced interest can improve cash flow and cap rate.
- Cons: Not all lenders allow points on investment properties.
- Tip: Include point costs in deal analysis models like ROI, NOI, and IRR.
Real Estate Professionals and Mortgage Advisors
- Use discount points as an educational tool.
- Help clients evaluate points in the context of market rates, life plans, and closing cost budgets.
- Provide customized mortgage quotes to visualize breakeven analysis.
Pros and Cons of Mortgage Discount Points
Benefits
- Lower interest rate for the loan term
- Long-term savings over 15–30 years
- Reduced monthly payments
- Potential tax deductions
Drawbacks
- Higher upfront closing costs
- Takes years to break even
- May not make sense if refinancing or selling early
- Better rate could be available without buying points if market shifts
- Discount Points Calculator (MortgageCalculator.org)
- CFPB’s Mortgage Toolkit
FAQs
1. Are discount points the same as origination points?
No. Origination points are fees the lender charges to process your loan, while discount points are prepaid interest that reduce your interest rate.
2. Are mortgage points tax-deductible?
Yes, discount points may be tax-deductible if the loan is for your primary residence. Always consult a tax professional.
3. Can you negotiate discount points?
Sometimes. Lenders may offer rate-point combinations or specials during promotions.
4. Can seller concessions cover discount points?
Yes. Sellers can often contribute toward buyer closing costs—including discount points—as part of the negotiation.
Final Thoughts
Discount points can offer significant savings—but only when your time horizon, budget, and mortgage goals align.
If you’re staying long-term and have the funds to invest upfront, the math may work out in your favor. But if you’re likely to move or refinance soon, it might make more sense to skip the points and focus on other financial priorities.
Next Steps:
- Use a discount points calculator
- Ask your lender for rate options with and without points
- Speak with a real estate agent or mortgage advisor
- Consider how long you’ll stay in the home or hold the loan