Mortgage Discount Points: How to Find Your Break-Even
Discount points are a trade: you pay more at closing in exchange for a lower mortgage interest rate.
What exactly is a discount point?
The CFPB defines one point as 1% of the loan amount. On a $300,000 mortgage, one point costs $3,000. Half a point costs $1,500. But one point does not buy a fixed interest-rate reduction across every lender or every day. The actual pricing depends on the lender, loan type and market conditions. Ask for the exact interest rate and payment with and without points on the same day.
How the simple break-even calculation works
Compare two otherwise identical loans: one with no points and another with a lower rate that requires an upfront payment. Divide the additional upfront cost by the monthly principal-and-interest savings. For example, if points cost $3,000 and reduce the monthly payment by $100, the simple break-even is 30 months. That arithmetic ignores the time value of money, tax considerations and differences in principal balance over time, so it is a starting point rather than a complete financial recommendation.
What if you sell or refinance early?
If you keep the mortgage for only 18 months in the example, you would collect about $1,800 in nominal payment savings against a $3,000 upfront cost. If you keep it for 60 months, the nominal payment savings would be $6,000. The actual economics can differ due to amortization and cash flows. Consider how likely you are to sell, refinance or pay off the loan. No one can promise when mortgage rates will fall or that refinancing will be available.
Lender credits are the reverse tradeoff
Instead of paying points for a lower rate, a borrower may accept a higher rate in exchange for lender credits that reduce eligible upfront closing costs. That can help preserve cash but increase monthly and long-term interest expense. CFPB guidance says credits tied to the rate generally appear as a negative amount on page two of the Loan Estimate. A lender credit is not free money; understand the higher-rate tradeoff before choosing it.
Compare three quotes, not one advertised rate
Ask your loan officer to model the same loan amount, term and lock period with zero points, with a selected amount of points and with lender credits. Put the monthly principal-and-interest payments, upfront charges, total cash to close and estimated costs over three, five and seven years side by side. Also review the APR, but do not rely on APR alone to decide whether the loan fits your expected holding period. Ensure quoted fees are classified consistently.
Permanent points versus a temporary buydown
A permanent discount-point arrangement changes the note rate for the loan. A temporary buydown is a different structure in which funds are used to subsidize some early payments; the note rate and qualifying rules may not be the same as the temporary payment. Do not confuse a seller-funded temporary buydown with buying a permanently lower interest rate. Ask for the note rate, payment schedule, funding source and applicable loan-program rules.
When might paying points make sense?
A borrower who has comfortable reserves, plans to hold the mortgage for years and receives meaningful savings for the price of points may find the tradeoff attractive. A buyer with limited cash, uncertain moving plans or a short expected holding period may prioritize liquidity. The decision should follow actual written options, not a blanket claim that points are always good or always bad.
Frequently asked questions
How much does one mortgage point cost?
One point equals 1% of the loan amount; the interest-rate reduction varies.
Can I finance discount points into my mortgage?
Whether costs can be financed depends on the transaction and program; ask for the exact Loan Estimate.
Do points lower my mortgage rate permanently?
Traditional discount points lower the note rate for that loan, unlike some temporary payment buydowns.
What if I refinance before the break-even date?
You may not recover the extra upfront cost through monthly savings; model your expected holding period.
Are lender credits better than points?
Neither is universally better. They trade upfront cash against the ongoing interest rate.
The bottom line
Discount points are a trade: you pay more at closing in exchange for a lower mortgage interest rate. Ask for a property- and borrower-specific comparison, and confirm any applicable underwriting requirements before making a commitment.
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