Mortgage points are upfront fees paid to reduce your interest rate. One point equals 1% of the loan amount. On a $400,000 mortgage, one point costs $4,000.
Points can be worth paying if you keep the mortgage long enough for the monthly savings to exceed the upfront cost. They can be a bad deal if you sell, refinance, or pay off the loan before reaching the break-even point.
If you are thinking about refinancing soon, read Refinance If Mortgage Rates Drop Half a Percent?. If you are comparing home-equity options, see HELOC vs Cash-Out Refinance in 2026.
What Are Mortgage Points?
Mortgage points, also called discount points, are prepaid interest. You pay more at closing in exchange for a lower interest rate.
The basic math:
point cost = loan amount x points percentage
Examples:
| Loan amount | Points | Upfront cost |
|---|---|---|
| $250,000 | 0.50 | $1,250 |
| $250,000 | 1.00 | $2,500 |
| $400,000 | 0.50 | $2,000 |
| $400,000 | 1.00 | $4,000 |
| $600,000 | 1.00 | $6,000 |
The rate reduction is not fixed by law. One point does not always reduce the rate by the same amount. It depends on the lender, loan type, market conditions, and pricing that day.
Break-Even Formula
Use this formula:
break-even months = upfront point cost / monthly payment savings
Example:
- Loan amount: $400,000
- Points paid: 1.00
- Cost: $4,000
- Monthly savings from lower rate: $120
Break-even:
$4,000 / $120 = 33.3 months
If you keep the loan longer than about 34 months, the points may pay off. If you refinance or sell before then, the points may lose money.
Points vs Lender Credits
Lender credits are the opposite of points. You accept a higher interest rate, and the lender gives a credit toward closing costs.
| Choice | Upfront cost | Monthly payment | Best when |
|---|---|---|---|
| Pay points | Higher | Lower | You expect to keep the loan a long time |
| Zero points | Middle | Middle | You want a clean comparison |
| Take lender credit | Lower | Higher | You may sell or refinance soon |
When shopping lenders, compare the same point structure across offers. A 6.25% loan with 1 point is not directly comparable to a 6.50% loan with no points unless you include the upfront cost.
Refinance Risk
Points are riskier when rates may fall. If you pay thousands upfront to lower your rate, then refinance one year later, you may not recover the upfront cost.
This is why the break-even period should be comfortably shorter than the time you realistically expect to keep the loan. If the break-even is 48 months and you may move in two years, points are usually hard to justify.
Tax Treatment
Mortgage points may be deductible, but the timing depends on the loan purpose and IRS rules. Points paid to buy or build a main home may be deductible in the year paid if requirements are met. Points paid on a refinance are often deducted over the life of the loan.
The deduction only matters if you itemize. Many taxpayers use the standard deduction, so the tax benefit may be limited or nonexistent.
For the deduction decision, read Standard Deduction vs Itemizing 2026.
Bottom Line
Mortgage points are worth considering only after you calculate the break-even period. Pay points when the monthly savings are meaningful and you expect to keep the loan beyond break-even. Avoid points when you may refinance, sell, or need cash for reserves.
Related Reading
- Refinance If Mortgage Rates Drop Half a Percent?
- HELOC vs Cash-Out Refinance in 2026
- Standard Deduction vs Itemizing 2026
- Treasury Bills vs CDs vs High-Yield Savings in 2026
Sources
- CFPB, lender credits and discount points: https://www.consumerfinance.gov/ask-cfpb/how-should-i-use-lender-credits-and-points-also-called-discount-points-en-136/
- CFPB, mortgage discount point report: https://www.consumerfinance.gov/about-us/newsroom/cfpb-finds-americans-are-paying-upfront-fees-seeking-to-lower-interest-rates-on-mortgages/
- IRS Publication 936, home mortgage interest deduction: https://www.irs.gov/publications/p936