Should I buy mortgage points to lower my interest rate?

Should I buy mortgage points? Buy them only if you plan to keep the loan longer than your break-even point. That is the month when the money you save on lower payments finally equals what you paid upfront. If you might sell, move or refinance before then, the points cost more than they save.

Points are not good or bad on their own. They are a trade: cash today for a lower rate for as long as the loan lasts. This guide shows how that trade works, how to run the break-even math, and how to tell which side of it you are on.

What are mortgage points?

Mortgage points, also called discount points, are an upfront fee you pay the lender at closing in exchange for a lower interest rate. One point costs 1% of your loan amount. You can often buy fractions of a point, and the rate drop per point is set by each lender.

The Consumer Financial Protection Bureau (CFPB) explains that one point on a $100,000 loan costs $1,000. Lenders also price smaller pieces, such as 0.5 points ($500 on that loan) or 0.125 points ($125).

How much one point lowers your rate is not fixed. The CFPB says it depends on the lender, the type of loan and market conditions. Sometimes a point buys a big cut, and sometimes it buys very little. That is why you need the lender’s actual numbers before you decide.

Points are not the same as origination fees

Some lenders also charge an origination fee, sometimes written as a percentage like “1% origination.” That fee pays the lender for making the loan. It does not lower your rate. Check each line in Section A so you know which charge buys a lower rate and which one does not.

How do you figure out the break-even point?

Divide the cost of the points by how much they lower your monthly payment. The answer is the number of months it takes to earn back the cost. If you expect to keep the loan well past that month, points can pay off. If not, keep the cash.

Here is the simple formula:

1. Find the cost of the points in dollars (loan amount × points ÷ 100).
2. Find the monthly principal and interest payment with and without the points.
3. Subtract to get the monthly savings.
4. Divide the cost by the monthly savings to get your break-even month.

The table below shows the same hypothetical loan with zero, one and two points. Assume, for this example only, that each point lowers the rate by 0.25 percentage points. Your lender’s offer may be different.

P&I means principal and interest. The figures leave out taxes, insurance and mortgage insurance, which points do not change.

The simple formula is a little conservative

A lower rate also means more of each payment goes to principal. In this example, after five years the one-point loan has about $900 less left to pay off than the no-point loan. If you count that, the true break-even comes closer to 4 years than 5. The simple formula still works well as a quick test.

When does buying points make sense?

Points tend to make sense when you are confident you will keep the same loan for a long time, you have extra cash after your down payment and reserves, and the lender’s rate cut per point is meaningful. All three need to be true, not just one.

Points are more likely to pay off if:

• You plan to stay in the home for many years, well past your break-even month.
• Rates in the market are not likely to fall enough to make you refinance soon. No one can predict this, so be honest about the risk.
• You still have a healthy emergency fund after paying for the points.
• The lender’s offer gives a real rate drop for each point, not a tiny one.
• You want the lowest possible payment for the long term, such as heading into retirement.

When should you skip points?

Skip points when you might sell, move or refinance before your break-even month, or when the cash would do more good elsewhere. Money spent on points is gone if the loan ends early. A bigger cash cushion or down payment is often the safer choice for first-time buyers.

Points are often a poor fit if:

• You may move for work or family within a few years.
• You think you will refinance if rates drop. Refinancing ends the old loan, and the points stop paying you back. Our guide on when to refinance your mortgage explains how refinance break-even works.
• Paying for points would leave you with little savings after closing.
• Putting the same money toward your down payment would cut or remove mortgage insurance. Learn how that works in when you can remove PMI.
• You are stretching to qualify. A smaller cash balance can make closing harder if a cost comes in higher than expected.

What are lender credits, and how do they compare?

Lender credits are the reverse of points. You accept a higher interest rate, and the lender pays some of your closing costs. You bring less cash to closing but pay more each month. Credits can make sense if you expect to move or refinance within a few years.

The CFPB notes that credits are calculated the same way as points. A $1,000 credit on a $100,000 loan is like “negative one point.” Lender credits appear as a negative number in Section J of the Loan Estimate.

In the CFPB’s own example, a $180,000 loan at 5.00% with no points could instead be:

• 4.875% with 0.375 points: you pay $675 more at closing and save about $14 a month.
• 5.125% with a lender credit: you get $675 toward closing costs and pay about $14 more a month.

The same break-even logic applies in reverse. With credits, you come out ahead if the loan ends before the extra monthly cost adds up to more than the credit. If you are short on closing cash, our guide to how much closing costs are covers other ways to lower them.

How do points show up on your Loan Estimate?

Points appear in Section A, “Origination Charges,” on page 2 of the Loan Estimate and Closing Disclosure. The interest rate on page 1 should reflect the points you are paying. Compare offers from different lenders using the same number of points, or the comparison will be misleading.

A lender must send your Loan Estimate within three business days of your application. When you compare offers, line up:

1. The interest rate on page 1.
2. The points in Section A, in both percent and dollars.
3. Total origination charges in Section A.
4. Any lender credits in Section J.
5. The total cost over five years, shown on page 3 as “In 5 Years.”

The CFPB’s Loan Estimate explainer suggests asking whether a similar loan without points is available and how each choice changes your total cost. If one lender quotes a low rate with two points and another quotes a slightly higher rate with none, you are not comparing the same thing.

For current market averages, check Freddie Mac’s weekly Primary Mortgage Market Survey. Note that Freddie Mac says it no longer reports average fees and points, so the survey rate is a rough guide, not a quote. The CFPB’s Explore interest rates tool shows how credit score, down payment and loan type affect the rate you may be offered.

Are mortgage points tax-deductible?

Sometimes. Points paid on a loan to buy or build your main home can often be deducted in the year you pay them, but only if you itemize deductions and meet several IRS tests. Points on a refinance are generally deducted a little each year over the loan term.

According to IRS Topic 504, points on a loan for your principal residence may be deductible in the year paid if, among other tests:

• The loan is secured by your main home and used to buy, build or improve it.
• Paying points is an established practice in your area, and the amount is normal for the area.
• The points are figured as a percentage of the loan and clearly shown on the settlement statement.
• You brought at least as much of your own money to closing as the points cost. You can’t pay for them with money borrowed from the lender.

IRS Publication 936 adds that refinance points are generally spread over the loan’s life. If you pay off or refinance the loan early, you can usually deduct the remaining amount that year, unless you refinance with the same lender.

Many households take the standard deduction instead of itemizing. In that case, points give you no tax benefit, so your decision should rest on the break-even math alone. A tax professional can tell you how the rules apply to you.

What to do next

Points are a math problem, not a mystery. Get real offers priced with and without points, work out your break-even month, and compare it with how long you honestly expect to keep the loan. Then check that you will still have savings left after closing.

1. Ask at least two lenders for the same loan priced three ways: no points, one point, and lender credits.
2. Run the break-even math for each offer: cost of points ÷ monthly savings.
3. Write down how long you realistically expect to keep this loan, then compare it to the break-even month.
4. Make sure you would still have a solid emergency fund after closing before paying for points.
5. If you want a second opinion, a HUD-approved housing counselor can review your offers at low or no cost. Find one with the CFPB’s housing counselor search.

If you are still early in the process, start with how much house you can afford so the payment you are trying to lower fits your budget in the first place.