Mortgage Points: How They Work and When to Buy Them

One mortgage point costs 1% of your loan amount and buys a permanently lower interest rate, so on a $400,000 loan a point is $4,000 due at closing. At the 6.71% average 30-year rate Freddie Mac reported on Sept. 3, 2026, buying the rate down a quarter point to 6.46% cuts the payment from $2,583.77 to $2,517.76, a saving of $66.01 a month, which means the $4,000 takes about 61 payments to earn back. Stay in the loan past year five and points win. Sell or refinance before then and you handed your lender free money.

Quick answer

• One point equals 1% of the loan: $4,000 on $400,000, $3,000 on $300,000, paid in cash at closing.
• Breakeven in months = point cost divided by monthly payment savings. Under 48 months is strong, over 72 is a gamble on staying put.
• The CFPB found 58.7% of home purchase borrowers paid discount points in 2023, a median of 1.0 point costing roughly $3,000.
• Purchase points are generally deductible in the year paid; refinance points must be spread across the loan term, per IRS Publication 936.
• Origination points are not discount points. They pay the lender for processing and buy you no rate reduction at all.

A point is 1% of the loan, and the exchange rate is not fixed

Points are calculated on the loan amount, not the purchase price. Put 20% down on a $500,000 house and your loan is $400,000, so a point costs $4,000 and half a point costs $2,000. Lenders will sell fractions. Most rate sheets price in eighths.

The CFPB describes discount points plainly: a fee, stated as a percentage of the loan amount, paid to the creditor at origination in return for a lower interest rate. That's the whole mechanism. You are prepaying interest to reduce the rate for the life of the loan.

Origination points are a different animal wearing the same name. That charge compensates the lender for making the loan, and it moves your rate by exactly zero. If a Loan Estimate shows 1% origination plus 1 discount point, you're paying two points and getting one point's worth of rate cut.

How much rate does a point buy? There's no universal answer, and anyone who tells you "a quarter point, always" is quoting folklore. Pricing moves daily with the mortgage-backed securities market and varies by credit score, loan type, lock length and loan size. The same $4,000 might buy 0.375% from one lender on a Tuesday and 0.125% from another on Thursday. That variation is exactly why the decision has to be made off your own Loan Estimates rather than a rule of thumb.

Points run in reverse too. Take a lender credit and you accept a higher rate in exchange for cash toward closing costs, which is the right trade for a buyer who's short on cash or expects to refinance.

The numbers that decide this

One line in that table does more work than the others. A median purchase borrower buying a single point for about $3,000 is making a five-year bet, and more than half of buyers in 2023 made some version of it.

Breakeven on a $400,000 loan, run all the way out

Assume a 30-year fixed at 6.71% with no points, and a lender who offers 6.46% for one point and 6.21% for two. Here's every number that matters.

• No points: $2,583.77 a month.
• One point ($4,000): $2,517.76 a month. Saves $66.01. Simple breakeven: 60.6 months.
• Two points ($8,000): $2,452.47 a month. Saves $131.29. Simple breakeven: 60.9 months.
• Held 30 years: total interest of $530,156 at 6.71% versus $506,393 at 6.46%, a difference of $23,763 on a $4,000 outlay.

Notice the second and third bullets have nearly identical breakevens. When a lender prices points linearly, buying two is not twice as good a deal as buying one, it's the same deal at double the stake. The second point only makes sense if you're confident about the same holding period and you have the cash sitting idle.

Now the part most calculators get wrong. Payment savings aren't your only return, because a lower rate also means a larger slice of each payment goes to principal. Run the amortization on both loans and at month 60 the 6.46% borrower owes $374,271 while the 6.71% borrower owes $375,336. That's $1,065 of extra equity on top of the payment savings.

Fold the equity in and the real breakeven arrives at month 48, not month 61. Four years, not five. If you sell in year five at 6.46%, you're ahead by roughly $1,000 after recovering the point, which is a modest but genuine win that a payment-only calculator would have shown as a loss.

Push the horizon to seven years and compare total cost, meaning points paid plus 84 payments plus the balance still owed: $579,952 with no points, $576,915 with one point, $573,893 with two. The gaps are real, and they're smaller than the marketing suggests.

What the IRS lets you deduct, and why it might be nothing

Points on a loan to buy or build your main home are generally deductible in full in the year you pay them, provided the charge is a straight percentage of the loan amount and the practice is standard in your area, according to IRS Publication 936. That's the friendly case.

Refinances are treated differently. Publication 936 requires points on a refinance to be deducted ratably over the life of the loan, so $4,000 of points on a 30-year refi deducts at $11.11 a month, about $133 in a full year. The IRS gives the same structure in its own example: $4,800 in points on a 20-year loan with three payments made in 2025 yields a $60 deduction that year. If you use part of a cash-out refi to substantially improve the home, that portion of the points is deductible immediately, and the IRS worked example splits a $2,000 charge 25/75 to make the point.

Then there's the hurdle almost nobody clears by accident. The 2026 standard deduction is $32,200 for joint filers and $16,100 for singles per Rev. Proc. 2025-32, and points only help if your total itemized deductions beat that. First-year interest on our $400,000 loan at 6.46% is about $25,708, so a couple with property taxes and state income tax will typically clear $32,200 and get value from the deduction. A single filer with a $200,000 loan often won't come close.

Two more traps. Points on debt above the $750,000 acquisition-debt limit aren't fully deductible, and fees for services (appraisal, document prep, notary) never count as points no matter what the closing statement calls them. Seller-paid points can be deducted by the buyer under Publication 936, with the buyer reducing the home's basis by the same amount.

When "you'll stay seven years, so buy points" is wrong

The standard advice compares your breakeven to how long you expect to own the home. It's the wrong comparison. What matters is how long you'll keep this loan, and loans die long before houses get sold.

Rates are the reason. Freddie Mac's 30-year average sat at 6.71% on Sept. 3, 2026, up from 6.50% a year earlier, and the direction from here is nobody's to promise. Buy two points today, watch rates fall a point in 18 months, refinance, and your $8,000 bought you a year and a half of $131 monthly savings. Roughly $2,300 back on $8,000 out.

The CFPB flagged this exact risk when discount-point use spiked. Then-Director Rohit Chopra said in April 2024 that heavy use of points "suggests that many borrowers are uncertain about their ability to refinance in the future." Borrowers were buying protection against a future they couldn't control.

Points are also weakest for the people most often sold them. CFPB research found borrowers with lower credit scores were more likely to pay points, and that FHA borrowers with low scores were especially likely to, with lenders using points to shrink the monthly payment and the debt-to-income ratio enough to get the loan approved. Buying an approval is a legitimate reason to pay points. Just call it what it is, because those borrowers are usually the ones with the least cash to spare and the most reason to refinance later.

Should a cash-tight buyer ever pay points? Rarely. Four thousand dollars in a savings account covers a failed HVAC compressor. The same $4,000 spent on a point returns $66 a month and can't be recovered without selling the house.

One alternative deserves more attention than it gets: the 15-year fixed averaged 6.04% on Sept. 3, 2026, roughly two-thirds of a percentage point below the 30-year, and it costs zero upfront. If your goal is a lower rate and you can carry the payment, the shorter term beats any point purchase on price.

Four mistakes that turn points into a bad trade

1. Comparing Loan Estimates with different point levels. Lender A at 6.375% with 1.5 points is not beating Lender B at 6.625% with zero. Ask every lender for a quote at the same point level, then compare, then decide about points with the winner.
2. Trusting APR to settle it. APR spreads the points over the full 30 years. If you'll hold the loan seven years, APR is answering a question you didn't ask and it will always flatter the points-heavy quote.
3. Financing the points. Rolling $4,000 into the balance means borrowing at 6.46% to buy a rate cut, which pushes the breakeven out and shrinks the benefit. Points work as a cash purchase.
4. Ignoring what the cash would otherwise do. A one-point purchase yields about $66 a month on $4,000. That's a defensible return if the money would sit in checking, and a poor one if it means skipping the employer 401(k) match.

How to price points this week

1. Ask three lenders for Loan Estimates on the same day with the same lock period, all quoted at zero discount points. Rate sheets reprice daily and cross-day comparisons are meaningless.
2. Ask your preferred lender for the same loan at 0.5, 1 and 2 points, and get it in writing on page 2 of the Loan Estimate under Origination Charges.
3. Divide each point cost by the monthly payment savings it buys. Anything above about 72 months, walk away unless you have a specific reason to expect never to refinance.
4. Subtract the extra principal paid down. Pull the amortization schedule for both rates, compare balances at your expected sale date, and add that difference to your savings. It typically pulls the breakeven forward by a year.
5. Check whether the seller will pay them. A seller credit applied to discount points can be deductible by you under Publication 936 rules, and a rate buydown funded by the seller often beats an equivalent price cut on the monthly payment.

Do this first: email your lender and ask for the identical loan priced at zero points and one point, same lock, same day. Divide the point cost by the payment difference. If that number of months is longer than you'd honestly bet on keeping the loan, take the zero-point rate and put the cash in reserves.