Mortgage discount points are a form of prepaid interest: you pay cash upfront at closing in exchange for a permanently lower interest rate on your loan. Whether this is a good deal depends entirely on how long you’ll keep the loan.
What One Point Costs and Does
One discount point equals 1% of the loan amount. On a $400,000 loan, one point costs $4,000.
In exchange, the lender reduces your interest rate — typically by 0.25% per point, though the exact reduction varies by lender, loan type, and current market conditions. This isn’t a fixed rule; it depends on how the lender prices points at the time of your loan.
Example on a $400,000 loan:
| No points | 1 point ($4,000) | 2 points ($8,000) | |
|---|---|---|---|
| Rate | 7.00% | 6.75% | 6.50% |
| Monthly P&I | $2,661 | $2,594 | $2,528 |
| Monthly savings | — | $67 | $133 |
The Break-Even Calculation
How many months do you need to keep the loan to recover the cost of the points?
Break-even = Points cost ÷ Monthly payment reduction
From the example above:
- 1 point: $4,000 ÷ $67 = 60 months (5 years)
- 2 points: $8,000 ÷ $133 = 60 months (5 years)
If you sell or refinance before month 60, you’ve paid $4,000–$8,000 for a rate reduction you didn’t keep long enough to benefit from. If you stay 10, 20, or 30 years, the savings compound significantly.
Points vs. Origination Fees: Know the Difference
Discount points are optional. You pay them to lower your rate. They’re a choice you make.
Origination fees are a lender charge for processing your loan. They may also be expressed in “points” (1% of loan amount), but paying them doesn’t reduce your rate — they’re just the cost of the loan. Some lenders charge origination fees; others don’t. Always compare lenders on APR, which includes both the rate and the origination cost.
When comparing loan quotes, a low rate with high origination fees may cost more than a higher rate with no fees, depending on your timeline. This is why APR exists — it normalizes the rate and fees into a single comparable figure.
When Buying Points Makes Sense
You’re planning to stay long-term. If you’ll live in the home for 10+ years and plan to keep the original loan (no refinancing), the rate savings easily exceed the upfront cost.
Current rates are high and you expect to stay. Buying points is more compelling when rates are elevated, because the absolute dollar value of each 0.25% rate reduction is larger on a higher starting rate.
You have excess cash at closing. Points are only valuable if the alternative use of that cash (investing, paying down other debt) produces a lower return than the guaranteed rate of return on paying down your mortgage rate.
You’re buying your “forever home.” Shorter-term buyers should be skeptical of points.
When Buying Points Doesn’t Make Sense
You plan to refinance within 5 years. If rates drop and you refinance, you lose the benefit of the points you paid. The break-even clock resets.
You have limited cash reserves. Depleting your reserves to buy points is financially risky. Keep 3–6 months of PITI in liquid savings after closing.
You need the cash for other purposes. $4,000 applied to high-interest credit card debt might produce a better return than buying down your mortgage rate.
Negative Points (Lender Credits)
The same mechanic works in reverse. A lender can offer you credits toward closing costs in exchange for a higher rate. If you’re short on cash at closing and plan to sell or refinance in a few years, accepting a higher rate in exchange for a $3,000 credit toward closing costs might make financial sense — you pay the cost through the higher rate over time rather than upfront.
Use the Points Calculator on LendingPulse to model any specific scenario: enter the loan amount, the rate reduction per point, and your expected hold period to find the break-even threshold and total savings.