Mortgage Points: How They Work and When to Buy Them

Mortgage discount points trade cash at closing for a lower interest rate. One point is 1% of the loan amount: $4,000 on a $400,000 mortgage. Whether that purchase pays off depends on the lender's actual rate reduction, how long you keep the loan, the remaining balance when you exit, and what the upfront cash could otherwise do.

What one point buys

The CFPB explains the tradeoff: a point's cost is fixed as a percentage, but its rate reduction is not. Request alternative point levels for the same loan and lock period. An origination or service fee is not evidence that you bought a lower rate. Rate-linked lender credits reverse the trade, reducing closing costs while increasing the rate; some credits are unrelated to rate.

For context, Freddie Mac's September 3, 2026 survey reported a 6.71% average 30-year fixed rate. That is not an available zero-point quote: Freddie Mac says its current survey cannot report average fees and points. The options below use that rate as a numerical starting point and invent the reductions solely to illustrate the calculation.

A $400,000 example: payments and remaining debt

Assume three fully amortizing, 30-year fixed loans with the same $400,000 principal. Points are paid in cash at closing; all other fees are equal. Payments occur monthly, with no extra principal or refinancing before the comparison date. Taxes, insurance, tax deductions and returns on retained cash are excluded. Calculations retain precision internally and display cents.

The one-point option saves about $66.01 per month. Dividing $4,000 by the unrounded payment saving gives 60.6 months: payment savings alone first cover the points after 61 payments. This simple measure ignores the difference in outstanding debt.

If both loans are paid off after month 60, the lower-rate loan also has $1,064.65 less principal remaining. Combining that balance advantage with payment savings, then subtracting the $4,000 point, gives a nominal benefit of $1,025.06. The balance-adjusted comparison first becomes positive at month 48. This is an undiscounted comparison, not a guaranteed investment return or a prediction of when you will refinance.

The balance-adjusted benefit at month m is: cumulative payment savings + zero-point balance − lower-rate balance − upfront points. Including a return on the cash retained with the zero-point loan changes the comparison. Taxes, unequal fees, financed points and different exit dates also change it. The displayed rounded balances differ by one cent from the rounded difference calculated at full precision.

Compare the period you will keep this loan

Homeownership can last longer than a particular mortgage. A refinance stops the old loan's future savings and brings its own costs. Run at least an early-exit, expected and longer-holding scenario; do not assume a future refinance will be available or economical. Nor does a lender credit automatically suit every cash-constrained borrower: the resulting monthly payment must remain affordable.

The Loan Estimate helps compare interest rates, origination charges, credits and cash to close. Keep loan amount, term and lock assumptions consistent. APR is useful standardized information, but it does not calculate your personal sale date, tax treatment or alternative investment return.

A 15-year loan changes both repayment speed and the payment requirement. It is a different product, not a free substitute guaranteed to outperform every 30-year points option. Compare actual fees, monthly affordability and balances over the same horizon. Our home-affordability guide explains the wider cash budget.

Are mortgage points tax deductible?

IRS Topic 504 describes points as prepaid interest. A deduction requires itemization and eligibility; it is not a dollar-for-dollar refund. Service charges do not become deductible interest merely because they are described as points.

Publication 936 generally spreads deductible points across the loan term. Its exception for full deduction in the year paid has multiple tests, including main-home security and use, customary charges, cash-method accounting, adequate qualifying funds at closing, and proper calculation and documentation. Refinancing generally follows the term-based rule; a qualifying substantial-improvement portion can receive different treatment. Seller-paid points require the buyer's basis adjustment and applicable eligibility tests. Debt limits and filing circumstances can restrict deductions.

Do not assume the full point creates additional tax savings merely because you itemize. Compare the tax result with and without the transaction. The numerical tables above include no deduction. Use the applicable tax-year guidance when preparing a return; the publication available at this review is for 2025.

Questions to resolve before paying points

• What rate reduction does this exact upfront charge buy in writing?
• How much cash remains after closing for repairs and other commitments?
• How do payments and payoff balances compare at an early exit and your expected horizon?
• Would different fees, financing the points or retaining the cash change the result?

Those answers determine the trade. A universal 48-, 60- or 72-month cutoff cannot replace them.