Understanding Mortgage Points: When Buying Down Your Rate Makes Sense
What Are Mortgage Points?
A mortgage point, also called a discount point, is a fee you pay your lender at closing to reduce your interest rate. One point costs 1% of your loan amount and typically lowers your rate by 0.25%, though this varies by lender and market conditions. On a $400,000 loan, one point costs $4,000. If it drops your rate from 6.75% to 6.50%, your monthly payment falls from $2,594 to $2,528, saving you $66 per month. Two points would cost $8,000 and might bring you to 6.25%, saving $132 monthly. Points are prepaid interest. You are essentially paying interest upfront in a lump sum in exchange for a lower ongoing rate. The IRS generally allows you to deduct points in the year you pay them on a purchase mortgage, which can offset some of the upfront cost if you itemize deductions. On a refinance, you typically amortize the deduction over the life of the loan.
The Break-Even Calculation
The critical question is: how long until the monthly savings recoup the upfront cost? This is your break-even point. Using the example above, you paid $4,000 for one point and save $66 per month. Divide $4,000 by $66 and you get 60.6 months, or just over five years. If you sell or refinance before that five-year mark, you lost money on the deal. If you stay longer, every month after break-even is pure savings. Over a full 30-year term, that $66 monthly savings adds up to $23,760 in reduced payments, minus the $4,000 upfront cost, for a net benefit of $19,760. That is a strong return, but only if you actually stay for 30 years. The median homeowner stays about 13 years, which would yield $10,296 in net savings after subtracting the $4,000 cost. Use our <a href="/finance/mortgage-calculator">Mortgage Calculator</a> to compare monthly payments at different rates and see the total interest difference over your expected holding period.
When Points Make Sense
Points tend to be a good deal in three specific situations. First, when you are buying your "forever home" and plan to stay at least 7-10 years. The longer you hold, the more the savings compound. Second, when you have excess cash at closing that would otherwise sit in a savings account earning 4-5%. The effective return on points often exceeds 10% annualized over a long hold. Third, when rates are relatively high and you want to lock in a lower effective rate without waiting for the market to drop. Points are a bad deal when you might move within 3-5 years, when you would need to deplete your emergency fund to afford them, or when you could instead use the cash for a larger down payment to eliminate PMI. Eliminating $200/month in PMI is almost always a better use of cash than saving $66/month through points. Use the <a href="/business/break-even-calculator">Break-Even Calculator</a> to run the exact numbers for your situation. Input your point cost as the fixed cost and your monthly savings as the per-unit revenue.
Fractional Points and Lender Credits
You do not have to buy whole points. Most lenders offer fractional points, like 0.5 points for roughly 0.125% off your rate. This halves the upfront cost and the break-even period, which can make sense for people unsure about their timeline. The reverse also exists. Lender credits, sometimes called negative points, mean the lender raises your rate slightly and gives you cash at closing to cover fees. If you are getting a 6.75% rate, you might choose 7.00% in exchange for a $3,000 credit toward closing costs. This makes sense when you plan to sell or refinance within 2-3 years, because the slightly higher payment costs less than the closing cost savings. Think of it as a spectrum. On one end, you pay more upfront for lower monthly costs. On the other, you pay less upfront but more each month. Your expected time in the home determines where on that spectrum to land.
The Tax Angle and Opportunity Cost
Points paid on a home purchase are generally tax-deductible in the year of purchase, but this only helps if you itemize deductions. With the standard deduction at $14,600 for single filers in 2026, many buyers do not itemize, which means the tax benefit is zero. If you do itemize and are in the 24% tax bracket, deducting $4,000 in points saves you $960 in taxes, effectively reducing the net cost to $3,040. That drops the break-even period from 61 months to 46 months. Also consider opportunity cost. That $4,000 invested in an S&P 500 index fund with historical average returns of 10% would grow to roughly $6,500 over five years. Your points need to beat that return to be the better choice, and over a 5-year hold, they barely do. Over 10+ years, points usually win because the savings are locked in and guaranteed, while market returns are not.
Try These Calculators
Put what you read into practice with these free calculators.