Mortgage Points Explained: Should You Buy Down Your Rate?

Mortgage points (also called discount points) let you prepay interest to get a lower rate. One point costs 1% of your loan amount and typically reduces your rate by 0.25%. On a $400,000 loan, one point costs $4,000 and might drop your rate from 6.5% to 6.25%, saving $60/month. You’d break even in 67 months—if you keep the loan longer, buying points saves money.

What Are Mortgage Points?

Points are upfront fees you pay at closing to reduce your interest rate. They’re essentially prepaid interest.

Two Types of Points

Discount points: Lower your interest rate. This is what people usually mean by “buying points.”

Origination points: Lender fees for processing the loan. These don’t reduce your rate.

This article focuses on discount points—the kind that save you money.

How Points Work

1 point = 1% of loan amount
Each point typically reduces rate by 0.25%
Paid at closing as part of closing costs
Tax deductible in year paid (for primary residence purchase)

Points Cost and Savings Examples

$300,000 Loan Example

Points	Upfront Cost	Rate	Monthly P&I	Monthly Savings
0	$0	6.50%	$1,896	—
1	$3,000	6.25%	$1,847	$49
2	$6,000	6.00%	$1,799	$97
3	$9,000	5.75%	$1,751	$145

$400,000 Loan Example

Points	Upfront Cost	Rate	Monthly P&I	Monthly Savings
0	$0	6.50%	$2,528	—
1	$4,000	6.25%	$2,463	$65
2	$8,000	6.00%	$2,398	$130
3	$12,000	5.75%	$2,335	$193

$500,000 Loan Example

Points	Upfront Cost	Rate	Monthly P&I	Monthly Savings
0	$0	6.50%	$3,160	—
1	$5,000	6.25%	$3,079	$81
2	$10,000	6.00%	$2,998	$162
3	$15,000	5.75%	$2,918	$242

Calculating Your Break-Even Point

The break-even point tells you when buying points starts saving you money.

Break-Even Formula

Break-even months = Point cost ÷ Monthly savings

Break-Even Examples

$350,000 loan, 1 point:

Point cost: $3,500
Rate reduction: 6.5% → 6.25%
Monthly savings: $57
Break-even: $3,500 ÷ $57 = 61 months (5.1 years)

$350,000 loan, 2 points:

Point cost: $7,000
Rate reduction: 6.5% → 6.0%
Monthly savings: $113
Break-even: $7,000 ÷ $113 = 62 months (5.2 years)

What Break-Even Means

If you sell or refinance before break-even: Points cost you money

If you keep the loan past break-even: Points save you money

Jennifer Walsh bought 1.5 points on her $320,000 loan, paying $4,800 upfront to drop her rate from 6.75% to 6.375%. Her break-even was 58 months. She stayed 12 years and saved $13,400 overall.

When Buying Points Makes Sense

Good Candidates for Points

You’ll stay long-term: If you’re buying your “forever home” and plan to stay 10+ years, points almost always pay off.

You have extra cash: If you have more than enough for down payment and closing costs, points can be a good use of excess funds.

Rates are high: When rates are elevated, locking in a lower rate through points offers guaranteed savings.

You want a guaranteed return: Points offer a fixed return (your savings rate) regardless of market conditions.

Poor Candidates for Points

You might move soon: If there’s a chance you’ll sell within 5 years, points probably won’t pay off.

You might refinance: If rates drop and you refinance, you lose the benefit of bought points.

You’re cash-strapped: If buying points means a smaller down payment or depleted savings, skip them.

Better uses for money: High-interest debt payoff or investing might offer better returns.

Points vs. Larger Down Payment

Both reduce your monthly payment, but differently.

Comparison: $400,000 Home

Option A: 10% down, buy 1 point

Down payment: $40,000
Loan: $360,000
Point cost: $3,600
Rate: 6.25%
Monthly P&I: $2,217
PMI: ~$180
Total: $2,397

Option B: 15% down, no points

Down payment: $60,000
Loan: $340,000
Rate: 6.50%
Monthly P&I: $2,149
PMI: ~$85
Total: $2,234

In this case, the extra down payment wins—lower payment AND less PMI.

When Points Beat Extra Down Payment

You’re already at 20% down (no PMI to eliminate)
The point discount is unusually large
You have specific cash constraints

Fractional Points

You don’t have to buy whole points. Lenders offer fractional options.

Common Fractional Point Costs

Points	Cost on $300,000	Typical Rate Reduction
0.25	$750	0.0625%
0.50	$1,500	0.125%
0.75	$2,250	0.1875%
1.00	$3,000	0.25%
1.50	$4,500	0.375%
2.00	$6,000	0.50%

Fractional points let you fine-tune your rate vs. upfront cost balance.

Negative Points (Lender Credits)

You can also receive points in reverse—accepting a higher rate in exchange for cash toward closing costs.

How Negative Points Work

Instead of paying the lender to lower your rate, the lender pays you (in closing cost credits) to accept a higher rate.

Points	Effect on $300,000 Loan
-1 point	+0.25% rate, $3,000 credit toward closing
-0.5 points	+0.125% rate, $1,500 credit
0 points	Base rate
+1 point	-0.25% rate, $3,000 cost

When Negative Points Make Sense

Low on closing cost cash: Credits can cover closing costs you’d otherwise struggle to pay.

Short holding period: If you’ll sell or refinance within 2-3 years, the higher rate costs less than points would save.

No-closing-cost refinance: Accept a slightly higher rate to avoid out-of-pocket refinance costs.

Marcus Thompson accepted -1 point on his refinance, getting a $4,200 credit toward closing costs. His rate was 0.25% higher, but since he planned to sell in 3 years, he came out ahead.

Tax Deductibility of Points

Points paid on a mortgage for your primary residence are typically tax deductible.

Primary Residence Purchase

Points are usually fully deductible in the year you pay them if:

The loan is secured by your primary residence
Paying points is standard in your area
You didn’t borrow the money to pay points
Points are calculated as a percentage of loan amount

Refinance or Second Home

Points must be deducted over the life of the loan (amortized). On a 30-year loan, you’d deduct 1/30th per year.

Example Tax Savings

$4,000 in points, 24% tax bracket:

Tax savings: $4,000 × 24% = $960
Effective point cost: $4,000 - $960 = $3,040

The tax deduction reduces your actual cost of buying points. Consult a tax professional for your specific situation.

How to Decide: Step by Step

Step 1: Calculate Break-Even

Point cost ÷ Monthly savings = Break-even months

Step 2: Estimate How Long You’ll Stay

Be realistic. Consider job mobility, family plans and life changes.

Step 3: Compare Break-Even to Expected Stay

Staying longer than break-even? Points likely make sense.
Staying shorter? Skip points or take credits.

Step 4: Consider Alternatives

Could that money earn more invested? Pay off higher-rate debt? Increase your down payment?

Step 5: Factor in Uncertainty

If you’re unsure how long you’ll stay, lean toward fewer or no points. The risk of “wasting” point money is real.

Points Strategy by Situation

First-Time Buyer, Starter Home

Recommendation: Skip points or take credits

Why: You may outgrow the home in 5-7 years. Points likely won’t pay off.

Move-Up Buyer, Long-Term Home

Recommendation: Consider 1-2 points

Why: If you’re settling into your long-term home, the break-even math works.

Refinancing to Lower Rate

Recommendation: Calculate carefully

Why: Consider whether rates might drop further (losing point value) and your remaining time in home.

Investment Property

Recommendation: Usually skip points

Why: Tax treatment differs, and you may sell the property based on investment returns, not personal plans.

Frequently Asked Questions

How much does 1 mortgage point cost?

One point costs exactly 1% of your loan amount. On a $300,000 loan, one point is $3,000. On a $450,000 loan, one point is $4,500.

How much does 1 point reduce your rate?

Typically 0.25%, though this varies by lender and market conditions. Some lenders offer 0.125% or 0.375% per point. Always ask for the specific rate reduction.

Are mortgage points worth it?

It depends on how long you’ll keep the loan. Calculate your break-even point (cost ÷ monthly savings). If you’ll stay longer than break-even, points are worth it. If not, skip them.

Can you negotiate mortgage points?

Yes. Lenders have flexibility in their pricing. You can negotiate the rate reduction per point, request credits instead of paying points, or ask for the point cost to be reduced.

Do all lenders offer the same rate reduction per point?

No. Rate reductions vary by lender. One might offer 0.25% per point while another offers 0.20%. Compare the rate reduction, not just the point cost.

Should I buy points or make a larger down payment?

If you’re under 20% down, extra down payment usually wins because it reduces PMI. At 20%+, compare the break-even on points vs. return on investing that money elsewhere.