Mortgage Points
Upfront fees paid to a lender to reduce the mortgage interest rate, where one point equals 1% of the loan.
What is Mortgage Points?
Mortgage discount points are prepaid interest paid at closing to reduce the interest rate on a mortgage loan. One point equals 1% of the loan amount; each point typically reduces the interest rate by 0.25%, though the exact reduction varies by lender and market conditions. Paying points is a trade-off: higher upfront costs in exchange for lower monthly payments and total interest paid over the loan life. The break-even point — when accumulated monthly savings equal the upfront cost — typically ranges from 3–7 years. Points are tax-deductible in the year paid (for a primary residence purchase). Negative points (rebates) allow borrowers to receive closing cost credits in exchange for a higher interest rate.
Example
A borrower takes a $400,000 mortgage. The lender offers 6.5% with no points, or 6.0% by paying 2 points ($8,000 upfront). At 6.5%, the monthly payment is $2,528; at 6.0%, it is $2,398 — a $130/month saving. Break-even: $8,000 ÷ $130 = 61.5 months (about 5 years). If the borrower plans to own the home for 10+ years, paying points reduces total cost; if they plan to sell or refinance in 3 years, the upfront cost is not recovered.