Mortgage discount points: Are they worth the cost?

Key takeaways

• Discount points lower your mortgage rate but cost more upfront. Buyers typically pay 1% of the loan per point to reduce their interest rate, which can shrink monthly payments but add thousands of dollars to closing costs.
• Points only pay off if you stay long enough. Most borrowers need to remain in the home three to five years to break even; selling or refinancing sooner can erase the savings.
• Zero‑point mortgages may make sense for buyers who want flexibility, and some loans require points regardless, especially for investment or second homes.

When financing a home, discount points can be a strategy to lower the interest rate on your mortgage. By reducing your interest rate, you can potentially lower your mortgage payment and the interest you pay over the life of the loan. 

Mortgage discount points are an option available to prospective borrowers to help make their monthly payments more affordable. These discount points, almost always known as mortgage points, are fees you pay upfront to reduce your interest rate. However, whether you should buy them depends on the fees, the mortgage rate reduction and how long you plan to live in the house.

One discount point usually costs 1% of the loan amount. You can buy more than one point or a fraction of a point.

The lender calculates the cost of these points and you pay them as a form of prepaid interest along with your closing costs. Another option is to roll the cost of the points into your mortgage, but this also increases the amount you borrow.

“For the consumer, the best way to understand points is as an additional cost to get a certain interest rate at a certain time,” says Matthew Ricci, home loan specialist at Churchill Mortgage. “It is important to note that while often that cost is being used to get a lower rate to help them save money monthly, it is not always the case.” At certain times, some loan products will have points no matter which interest rate the lender provides.

There are also a maximum number of points you can purchase, but ask your loan officer about specifics. “There are federal regulations that limit the amount of fees a borrower can pay — even if they want to,” says Craig Garcia, president at Capital Partners Mortgage Services. “There have been instances where there are rates available but due to federal regulation, the borrower may not pay them.”

One point can lower your interest rate by 0.25%. For example, purchasing two discount points would reduce the interest rate by 0.50%. If the lender offers a 6.5% interest rate on your home loan, then the two points would bring the rate down to 6%. 

This can significantly impact monthly mortgage payments, particularly over the long run. On a $400,000 mortgage, a 6.5% interest rate would be about $2,528 per month. Buying two mortgage points would cost $8,000, but it would reduce the monthly payment to $2,398, a monthly savings of $130.

According to the Consumer Financial Protection Bureau, or CFPB, the amount your interest rate is reduced also depends on the lender, the kind of loan and the overall mortgage market.

Buying discount points makes financial sense in some situations, but not all.

As a general guideline, Michael Borodinsky, a branch manager at loanDepot, said buyers often need to stay in a home for about three years for the upfront cost of discount points to pay off through lower monthly payments though that timeline can change if rates move sharply.

Paying discount points may not make sense for buyers who expect to sell the home or refinance within a few years, especially if interest rates fall. Borodinsky noted that some borrowers prefer to keep upfront costs low so they don’t risk paying two sets of closing costs if they refinance soon.

Others recommend avoiding points altogether. Anna DeSimone, an expert in mortgage compliance, predatory lending, discrimination and fraud, recommends the zero-point mortgage instead.

A zero-point mortgage is a home loan with no discount points. According to the Consumer Financial Protection Bureau, a loan with one point should have a lower interest rate than a zero-point loan, assuming both loans are offered by the same lender and are the same type of mortgage.

• Length of homeownership: If you plan to move before you recoup what you paid, purchasing mortgage points doesn’t make financial sense.
• Interest rate environment: How much the discount points reduce your interest rate depends on the loan and the overall interest rate environment.
• Financial situation: Your available cash for a down payment, long‑term plans, monthly budget and overall closing costs should all factor into the decision.

The “break-even point” is the length of time it will take for you to recover what you paid for the mortgage discount points. You can calculate how many months it will take to break even by dividing the price of the discount point by the amount that you’ll save each month. For example, if a mortgage point that costs $4,000 will save you $65 per month, it will take a little more than five years to break even. 

“Whether you are borrowing $100,000 or $500,000, the mathematical formula is quite simple — it takes just about five years for borrowers to ‘recoup what they paid for points,’” says DeSimone.

• Long-term savings: Purchasing discount points can lower the interest rate on your loan. This leads to lower monthly payments and less interest paid over the loan term.
• Tax benefits: In some cases, homeowners who itemize deductions may be able to deduct mortgage points on their federal tax return. According to the IRS, whether points are fully deductible in the year they’re paid depends on factors such as the type of loan, how the points were paid and whether the home is a primary residence.

• Upfront cost: Discount points are another expense that can add thousands of dollars to your closing costs or mortgage.
• Time to realize savings: You can reduce your monthly mortgage payments, but it will take several years to recoup the upfront expense.

Some home loans come with discount points, while others, such as the zero-point mortgage, have no points added. Mortgage lenders may also offer borrowers the option to buy mortgage points. In some cases, it’s possible to negotiate discount points or even finance them.

“Because of the economic formula, you can’t negotiate a lower rate of interest because you are willing to pay points,” DeSimone says. “However, you can choose your option to go with a zero-point program, or opt for a better rate by paying one or two points.”

The lender determines the cost of each point and how much it lowers the annual percentage rate, or APR. However, you may be able to show a lender a better deal you received elsewhere and negotiate from there.

“Keep in mind many people buying investment properties, or second homes or many other scenarios may not be given a choice of not paying discount points,” Garcia adds.

A real estate agent can help you navigate transactional costs and potentially negotiate a better deal.

Generally, there are two options when it comes to how you pay for your discount points. You can either pay the points at closing or roll them into your loan balance. Any discount points you buy will appear on the loan estimate document, which you will receive within three business days of filling out the mortgage application. They will also appear in the closing disclosure that you’ll receive at least three business days before closing.

Many buyers don’t initially understand the difference between discount points and origination points, said Borodinsky. Discount points are prepaid interest used to lower a borrower’s mortgage rate, while origination points are lender fees charged for processing and underwriting the loan.

Borodinsky said lenders typically walk borrowers through a loan estimate that breaks out each cost separately, but online rate comparisons can blur that distinction. Rates advertised online may appear lower because they include additional discount points or lender fees that aren’t always obvious upfront, making offers look cheaper than they really are once the full costs are disclosed.

Before paying for discount points, do the math to determine whether you’ll save money in the long run. Discount points can potentially lower your monthly mortgage payment and the interest you pay over the loan term. But if you plan to sell or refinance before you recover your initial investment, it won’t make much financial sense.

One of the biggest mistakes buyers can make is focusing only on the monthly payment without considering how long they plan to keep the loan or how much cash they’ll need after closing for furniture, repairs or emergencies. Borodinsky said working through multiple scenarios with a mortgage professional can help buyers avoid locking themselves into a structure that doesn’t match their long-term goals.