Understanding mortgage terms can be hard — especially when words like “discount points” start popping up in rate quotes. Many homebuyers get confused or nervous when they first hear the term. But once you understand how discount points work, they can be one of the smartest tools to save money on your mortgage.
In this article, we explain discount points in clear, so you can decide whether they make sense for your situation.
What Are Mortgage Discount Points?
Mortgage discount points are upfront fees you can choose to pay when you close your mortgage. Each point usually costs 1% of your loan amount.
For example:
- On a $300,000 loan, one discount point typically costs $3,000.
- Two points would cost $6,000.
When you pay these points, your lender lowers your interest rate. Lower interest means lower monthly payments and less total interest paid over the life of your loan.
How Discount Points Work
Discount points act like prepaid interest. You spend money now so your monthly payments are smaller later.
Here’s how this usually works:
- One point often lowers the interest rate by about 0.25%, but this can vary by lender and market conditions.
- You pay that cost at closing as part of your closing costs.
- Your lower rate stays the same for the entire term of the mortgage (for fixed-rate loans).
Example:
A $350,000 mortgage without points might have a rate of 6.5%.
- With 1 point ($3,500), the rate might go down to 6.25%.
- With 2 points ($7,000), it could drop to 6.0%.
This could save you thousands of dollars in interest over 30 years.
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Pros of Paying Discount Points
Paying discount points can be a good choice when:
✔ You Plan to Stay Long-Term
If you’ll live in your home for many years, the monthly savings can add up and outweigh the upfront cost.
✔ You Want Lower Monthly Payments
Lower interest rates directly reduce your monthly mortgage payment, which may make your budget easier to manage.
✔ You Have Extra Cash at Closing
If you have funds left after your down payment and other closing costs, buying points gives you a way to invest that cash into long-term savings.
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Cons of Paying Discount Points
Before you buy points, also consider these downsides:
✘ Higher Upfront Cost
Points increase your closing costs. You pay more at closing rather than keeping that money in savings or investing it elsewhere.
✘ You Might Not Stay Long Enough
If you plan to sell, refinance, or move soon, paying points may cost you more than you save over time. Points only make sense if you stay past the break-even point — the moment when the monthly savings exceed the upfront cost.
✘ Not Always a Standard Amount
Different lenders lower rates by different amounts for each point. There’s no fixed rule that one point always equals a 0.25% reduction.
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What Is the Break-Even Point ?
The break-even point tells you when the money you saved on monthly payments equals what you paid for discount points.
How to calculate it:
Break-Even Months = Points Cost ÷ Monthly Savings
For example:
- If one point costs $3,000
- And it saves you $100 per month
- Break-even happens after 30 months ($3,000 ÷ $100 = 30)
If you stay in the house longer than 30 months, you start saving real money.
Tips Before You Buy Discount Points
Here are smart ways to decide what’s best:
🔹 Compare Offers Carefully
Ask lenders to show rate options with and without points so you can compare total costs and monthly payments.
🔹 Use APR for Comparison
The APR (Annual Percentage Rate) includes fees and points, giving you a better overall picture of cost versus interest rate.
🔹 Think About Your Plans
If you might sell or refinance soon, paying points may not be worth it.
🔹 Consider Lender Credits
Instead of paying points, you could accept a slightly higher rate and get lender credits to reduce your closing costs — good if you want lower upfront cash needs.
Are Discount Points Tax Deductible ?
In many cases, discount points are considered prepaid mortgage interest and may be tax deductible. However, tax laws change and deductions depend on your loan type and total mortgage size. Always check with a tax professional about your personal situation.
Final Verdict: Are Discount Points Worth It?
Discount points are not good or bad — they are a tool. They can save you thousands on interest if:
- You plan to stay in your home for many years
- You have the cash to pay upfront
- You understand the break-even point
But if your plans could change soon, points might not make financial sense.
The key is understanding your goals and comparing loan scenarios before you decide. Shopping around and running the numbers helps you make the best choice for your budget.
