You’re staring at the Loan Estimate from your lender, a dense, three-page document filled with figures and jargon that can make your head spin. As your eyes scan the columns, one line item in “Section A: Origination Charges” catches your attention: “Points.” The number next to it might be a few thousand dollars, a significant chunk of your closing costs. You’re left wondering, what exactly are these “points,” are they required, and most importantly, are you making a smart financial decision by paying them?
This is one of the most common and critical questions a homebuyer will face during the mortgage process. Paying for points can save you a substantial amount of money over the life of your loan, but in other scenarios, it can be a costly mistake.
Consider this your definitive guide to understanding mortgage points. We’ll break down the math, introduce you to the all-important “break-even point,” and give you a clear framework to decide if buying down your interest rate is the right move for you.
What Are Mortgage Points? A Simple Definition
Before we can decide if they’re worth it, we need to be crystal clear on what they are. The term “points” is mortgage-speak for certain fees paid to a lender at closing. One point costs 1% of your total mortgage loan amount. So, for a $400,000 loan, one point would cost you $4,000.
It’s crucial to understand that there are two distinct types of points, and they do very different things.
1. Discount Points (The Main Event)
This is what people are usually talking about when they discuss “buying points.” Discount points are a form of prepaid interest. You are paying a lump sum of cash at closing in exchange for the lender giving you a lower interest rate on your loan for the entire term. The more discount points you buy, the lower your interest rate will be. This, in turn, lowers your monthly mortgage payment.
2. Origination Points
This is a different beast entirely. An origination point is a fee the lender charges for creating, reviewing, and processing your loan application. It is part of the lender’s compensation for their work. Unlike discount points, origination points do not lower your interest rate. While less common in the transparent market of 2025, you should always ask your loan officer to clarify what any “points” in your loan estimate are for. If they are origination points, they are simply a part of the cost of getting the loan.
For the rest of this guide, when we refer to “points,” we will be talking about discount points.
How Do Discount Points Work? The Math Explained
Let’s put theory into practice with a real-world example.
Meet Sarah, who is buying a home in Denver, Colorado. She needs a mortgage of $500,000. Her lender offers her a 30-year fixed-rate mortgage with the following options:
Option A: No Points
- Interest Rate: 7.0%
- Monthly Principal & Interest (P&I) Payment: $3,326.51
- Upfront Cost for Points: $0
Option B: Buy 1 Point
- Cost of 1 Point: 1% of $500,000 = $5,000
- As a general rule of thumb (though this can vary by lender and market), one discount point typically lowers the interest rate by about 0.25%.
- New Interest Rate: 7.0% – 0.25% = 6.75%
- New Monthly P&I Payment: $3,242.75
By paying an extra $5,000 at closing, Sarah can lower her monthly mortgage payment by $83.76 ($3,326.51 – $3,242.75).
This seems like a good deal, but we’ve only answered how it works. We still haven’t answered the most important question: Is it worth it? To do that, we need to calculate the break-even point.
The Break-Even Point: The Key to Your Decision
The “break-even point” is the moment in time when your cumulative monthly savings from the lower interest rate equal the upfront cost of the points you purchased. After this point, you are officially “in the green,” and the savings are pure profit for the rest of your loan term.
The calculation is simple but powerful:
Total Cost of Points ÷ Monthly Savings = Number of Months to Break Even
Let’s plug in Sarah’s numbers:
- Total Cost of Points: $5,000
- Monthly Savings: $83.76
$5,000 ÷ $83.76 = 59.7 months
It will take Sarah 59.7 months, or just under 5 years, to recoup the initial $5,000 she spent on the point.
This single number—the break-even point—is the core of the entire decision.
So, Are Points Worth Buying? A Framework for Your Decision
With the break-even point calculated, you can now make an informed decision based on your personal financial situation and, most importantly, your future plans.
When to Seriously Consider Buying Points
You are an ideal candidate for buying discount points if you can say “yes” to most of these statements:
- You plan to stay in the home for the long haul. If you see this as your “forever home” or plan to be there for at least 7-10 years, you will spend many years past the break-even point enjoying those monthly savings.
- You have sufficient cash for closing costs AND the points. It’s crucial that paying for points doesn’t deplete your emergency fund or the cash you’ve set aside for moving expenses, furniture, and initial home repairs.
- You want the lowest possible monthly payment. For some, the psychological comfort and budgetary ease of a lower fixed monthly payment are paramount. Buying down the rate can provide this stability.
- Interest rates are relatively high. In a higher interest rate environment like we’ve seen in 2024-2025, buying down the rate can have a more significant impact and feel more valuable over the long term.
When to Skip Buying Points (And Keep the Cash)
On the other hand, you should probably decline to pay for points if you identify with these scenarios:
- You might move within a few years. If this is a starter home or you have a job that might require relocation in 3-5 years (before your break-even point), you will lose money on the transaction.
- You are tight on cash for closing. Your down payment and other essential closing costs (appraisal, title insurance, etc.) are non-negotiable. If paying for points strains your finances, it’s not worth it. That cash is better used for an emergency fund.
- You believe you might refinance soon. If you expect interest rates to drop significantly in the next few years, you will likely refinance. This would wipe out your original loan (and the benefit of the points you paid for), forcing you to start over.
- You have a better place for that money. Could that $5,000 get a better return if you invested it in the stock market or used it for a high-value home improvement project? This is an important opportunity cost to consider.
A Quick Word on “Negative Points” or Lender Credits
Did you know you can do the opposite of buying points? Many lenders offer the option of lender credits, sometimes called “negative points.”
Here’s how it works: The lender will offer you a credit to apply toward your closing costs in exchange for you accepting a higher interest rate. For example, the lender might offer Sarah a $3,000 credit if she accepts an interest rate of 7.25% instead of 7.0%.
This can be a fantastic option for cash-strapped buyers who need help covering their upfront closing costs. However, it means you will have a higher monthly payment for the life of the loan.
Are Mortgage Points Tax Deductible?
In many cases, yes, mortgage points can be tax-deductible in the year you pay them. According to the IRS in Publication 936, the points must be for your primary residence and meet several other criteria.
However, tax laws are complex and subject to change. It is absolutely essential to consult with a qualified tax professional or CPA to understand if you can deduct mortgage points based on your specific financial situation. Do not take this article as tax advice.
Frequently Asked Questions (FAQs)
Q1: How many discount points can I buy? This depends on the lender and the specific loan program. Most lenders will allow you to buy anywhere from 0.25 to 3 points. There is a point of diminishing returns, however. Each subsequent point you buy may have a smaller effect on your interest rate, so always ask your loan officer to model out the different scenarios for you.
Q2: Are mortgage points negotiable? The cost of a point (1% of the loan amount) is not negotiable. However, the interest rate reduction you get for buying a point can vary from lender to lender. This is why it is so important to get Loan Estimates from at least three different lenders. You can compare who is offering the best rate reduction for the same cost.
Q3: Do points make sense on a 15-year mortgage? Because you are paying off a 15-year mortgage so much faster, the monthly savings from buying points will be smaller, and the break-even point will often be further out. In many cases, it makes less sense to buy points on a shorter-term loan, but you should always run the break-even calculation to be sure.
Q4: Is it worth buying points when refinancing? The exact same logic applies to a refinance. You must calculate your break-even point and then ask yourself, “How long do I plan to stay in this home from the date of the refinance?” If you plan to stay well past the break-even point, it can be a smart move. If not, it’s better to keep the cash.
The Final Verdict: A Strategic Choice, Not a Requirement
Mortgage points are neither inherently “good” nor “bad.” They are a financial tool. The decision to pay for them is a strategic one that hinges entirely on two factors: your available cash at closing and your expected time in the home.
Don’t let a lender or real estate agent tell you that you should or shouldn’t buy points. Instead, empower yourself. Ask your loan officer for a side-by-side comparison of options, calculate your break-even point, have an honest conversation about your future plans, and make the decision that best aligns with your personal financial goals.
