Evaluating the Value of Mortgage Discount Points
Mortgage discount points, commonly called "points," are optional upfront fees paid to the lender at closing in exchange for a reduced interest rate on your loan—essentially allowing you to "buy down" your rate by prepaying interest.
Each point typically costs 1% of the loan amount and generally reduces your interest rate by approximately 0.25%, though this varies by lender, market conditions, and individual borrower qualifications.
The fundamental question facing homebuyers is whether paying points makes financial sense, which depends on several factors: how long you plan to stay in the home, your available cash for closing costs, your tax situation, and alternative uses for that capital.
The break-even analysis is critical—if you pay $6,000 for one point on a $600,000 mortgage that reduces your rate from 4.5% to 4.25%, you'll save approximately $100 monthly, meaning it takes 60 months (5 years) to recover your upfront investment through lower payments.
Homeowners who sell or refinance before reaching the break-even point lose money on the points purchase, while those who stay substantially longer benefit significantly.
Current tax law adds complexity: mortgage interest is tax-deductible for many homeowners, and points paid on a purchase mortgage are generally deductible in the year paid (subject to income limitations), while points on refinances must be amortized over the loan term.
This deductibility can improve the break-even calculation for some borrowers, though the 2017 Tax Cuts and Jobs Act's increased standard deduction means fewer homeowners itemize deductions, reducing this benefit.
Financial advisors typically recommend against paying points if you plan to move within 5-7 years, have limited cash for closing (where preserving emergency funds is more important than rate reduction), or could invest that money in higher-returning alternatives.
Conversely, points make sense for buyers with long-term homeownership plans, excess cash reserves, those who prefer payment certainty over investment volatility, or in low-rate environments where each quarter-point reduction provides substantial savings.
Some buyers strategically use points in combination with increased down payments to reach optimal LTV thresholds, simultaneously reducing their rate and eliminating PMI for maximum monthly savings and total cost reduction.