Finance term
Mortgage Points
Also known as: discount points, loan points, buy-down points
Definition
Mortgage points (also called discount points) are upfront fees paid to a lender at closing to reduce the interest rate on a loan. One point equals 1% of the loan amount. Paying points 'buys down' the rate and reduces monthly payments — the trade-off is a higher upfront cost versus long-term savings.
Detailed explanation
There are two types of points at closing: discount points (prepaid interest that lowers your rate) and origination points (a lender fee for processing the loan, separate from rate reduction). The term 'points' used without qualification usually refers to discount points.
Each point typically reduces the rate by 0.125%–0.25%, though the exact reduction varies by lender and market conditions. The CFPB's Loan Estimate (required under TRID rules) discloses points as a line item in the closing cost summary, making comparison easier across lenders.
The key metric is the break-even period: total points cost ÷ monthly payment savings. If 2 points cost $6,000 and save $120/month, the break-even is 50 months (~4.2 years). If you plan to stay in the home or keep the loan longer than the break-even, points deliver positive value; if you plan to sell or refinance sooner, they do not. Rising-rate environments favor buying points; falling-rate environments favor keeping closing costs low.
◈ Worked example
- 2 points on a $400,000 loan = $8,000 upfront. If this reduces the rate from 7.25% to 6.75%, monthly payment drops by ~$130. Break-even: 62 months (just over 5 years).
- Negative points (lender credits) do the opposite — the lender pays part of your closing costs in exchange for a higher rate.
Common questions
The most-asked questions about Mortgage Points — answered straightforwardly.
Are mortgage points tax-deductible? +
Discount points paid on a home purchase mortgage are generally deductible in the year paid if you meet IRS requirements (IRS Publication 936). Points paid on a refinance must be deducted ratably over the life of the loan. Consult a tax professional.
What's the difference between discount points and origination fees? +
Discount points are prepaid interest that reduce the rate. Origination fees are lender charges for processing the loan — they don't reduce the rate. Both appear on the Loan Estimate under 'Origination Charges.'
Further reading
From the ClearValue family
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