What are mortgage points?

The definition

Mortgage points — more precisely *discount points* — are an optional upfront fee paid to the lender at closing in exchange for a lower interest rate on the loan. Buying points is sometimes called "buying down the rate." They are prepaid interest, not a service charge.

The rule of thumb (and its limits)

A common convention: one point costs 1% of the loan amount and lowers the rate by roughly 0.25%. Both figures are approximate — the actual rate reduction per point varies by lender, loan type, and market conditions, and you can often buy fractions of a point. Always read the lender's specific point-to-rate table rather than assuming 0.25%.

The break-even math (this is the whole decision)

Points are an upfront cost that buys a smaller monthly payment. Whether they "pay off" is pure arithmetic:

`` Break-even (months) = cost of points ÷ monthly payment savings ``

Worked example — a $300,000 loan:

Past the break-even point the monthly savings are pure gain; before it, you have not recovered the upfront cost. So the decision turns mechanically on how long the loan is actually kept — selling or refinancing before break-even means the points lost money; holding well beyond it means they saved money.

Discount vs origination points, and negative points

• Discount points — buy down the rate (the subject here).
• Origination points — a lender fee for making the loan; they do *not* lower the rate.
• Negative points (lender credits) — the reverse: the lender pays some of your closing costs in exchange for a *higher* rate.

When the break-even doesn't favor points

The same arithmetic cuts the other way. If the loan is likely to be sold or refinanced before the break-even month, the upfront cost is never recovered. And the cash spent on points has an opportunity cost — money used to buy down the rate is money not kept liquid or put elsewhere — so a full comparison weighs the monthly saving against what that lump sum would otherwise do. None of that is a recommendation; it is the same break-even math viewed from the cost side, and it turns entirely on how long the loan is held and your own alternatives.

Tax note

Discount points are prepaid interest and may be tax-deductible — the rules (deduct now vs over the loan's life) depend on your situation. Consult a tax professional; this is not tax advice.

This explains the mechanics, not financial advice. It describes how the math works — it does not recommend a loan, lender, or whether to borrow, buy, or refinance. Terms, rates, and rules vary by lender and jurisdiction; verify current figures with the lender and, for your own situation, a HUD-approved housing counselor or a fee-only fiduciary advisor (e.g. via NAPFA).

Cross-reference: see /pages/what-is/amortization for how the rate drives the payment split + /pages/what-is/apr for how points fold into the loan's true annual cost.