What Are Mortgage Discount Points? Costs, Savings, and Break-Even Math
February 23, 2026
Your lender offers you a choice: pay 6.5% with no upfront cost, or pay $6,400 at closing to drop your rate to 6.25%. Is that a good deal? The answer depends entirely on how long you plan to keep the loan.
Mortgage discount points are prepaid interest. You pay a lump sum at closing, and in return, the lender gives you a lower interest rate for the life of the loan. Each point costs 1% of your loan amount and typically reduces your rate by about 0.25 percentage points, though the exact reduction varies by lender and market conditions.
Table of Contents
- How Discount Points Work
- The Break-Even Calculation
- When Buying Points Makes Sense
- When Buying Points Doesn't Make Sense
- Points vs. Larger Down Payment
- Discount Points vs. Origination Points
- Negative Points (Lender Credits)
- Run the Break-Even Math First
How Discount Points Work
The concept is simple: you're paying interest upfront to reduce the amount of interest you pay over time.
One discount point = 1% of your loan amount
On a $320,000 loan:
- 1 point = $3,200
- 2 points = $6,400
- 0.5 points = $1,600
You can buy fractional points too. Half a point, quarter of a point, whatever your lender offers. The rate reduction scales proportionally.
Here's what buying points might look like on a $320,000, 30-year fixed mortgage:
| Points Purchased | Upfront Cost | Interest Rate | Monthly Payment | Monthly Savings |
|---|---|---|---|---|
| 0 | $0 | 6.50% | $2,023 | -- |
| 0.5 | $1,600 | 6.375% | $1,997 | $26 |
| 1 | $3,200 | 6.25% | $1,970 | $53 |
| 2 | $6,400 | 6.00% | $1,919 | $104 |
At first glance, $53 a month in savings might not seem like much. But over 30 years, one point saves you about $19,000 in total interest while costing you $3,200 upfront. That's a solid return on your money, if you keep the loan that long.
The Break-Even Calculation
Discount Points Calculator
The critical question with discount points is: how long until the monthly savings pay back the upfront cost?
The math is straightforward:
Break-even months = Cost of points / Monthly savings
Using the 1-point example above:
$3,200 / $53 = 60 months (5 years)
If you keep the loan for more than 5 years, buying the point saves you money. If you sell or refinance before 5 years, you lose money on the deal.
Here's the break-even timeline for different scenarios:
| Points | Cost | Monthly Savings | Break-Even |
|---|---|---|---|
| 0.5 | $1,600 | $26 | ~62 months (5.2 years) |
| 1 | $3,200 | $53 | ~60 months (5 years) |
| 2 | $6,400 | $104 | ~62 months (5.2 years) |
Notice that break-even periods tend to cluster around 5 years regardless of how many points you buy. This is because both the cost and the savings scale proportionally.
When Buying Points Makes Sense
You plan to stay long-term
If you're buying your "forever home" or plan to stay at least 7 to 10 years, buying points is almost always a good deal. The longer you hold the loan past the break-even point, the more you save.
Rates are high and likely to stay that way
When rates are elevated and forecasts suggest they'll stay in a similar range, buying points makes more sense than when rates are expected to drop significantly. If rates fall enough to make refinancing worthwhile within a few years, you'd abandon the rate you paid to buy down.
You have extra cash at closing
If you've already hit your target down payment and have additional funds available, buying points can be a better use of that money than a slightly larger down payment. Going from 20% to 22% down doesn't change your terms much, but buying a point at 20% down lowers your payment for the life of the loan.
You want tax benefits
Mortgage discount points are generally tax-deductible in the year you pay them (for a purchase) or over the life of the loan (for a refinance). If you itemize your deductions, this effectively reduces the net cost of the points and shortens your break-even period.
When Buying Points Doesn't Make Sense
You might move or refinance soon
If there's a realistic chance you'll sell the home or refinance within 5 years, buying points is likely a losing proposition. The monthly savings won't have time to recoup your upfront cost.
You're stretching to cover closing costs
Discount points are optional. If paying for them means you'll drain your savings or have trouble covering other closing costs, skip them. Having cash reserves after closing is more important than a slightly lower rate.
The rate reduction is unusually small
Not all lenders offer the same reduction per point. If a lender is only offering 0.125% reduction per point (instead of the typical 0.25%), the break-even period stretches to 8 to 10 years. Always calculate the actual break-even before deciding.
You could invest the money instead
If you'd earn more by investing the $3,200 than you'd save on your mortgage, investing is the better financial move. At today's mortgage rates around 6.5%, the guaranteed "return" from buying points is roughly 6.5% (since you're reducing interest at that rate). That's competitive with stock market returns, but it's not liquid. Once you pay points, that money is gone.
Points vs. Larger Down Payment
A common question: should you use extra cash to buy points or make a bigger down payment?
The answer depends on where you are relative to key thresholds.
If you're below 20% down: A larger down payment to reach 20% eliminates PMI, which usually saves more money per month than buying points. Getting from 15% to 20% down on a $400,000 home saves you roughly $100 to $150/month in PMI alone.
If you're already at 20% down: Buying points is usually the better use of extra cash. Going from 20% to 25% down only slightly changes your LTV and rarely improves your rate. A point or two, on the other hand, directly reduces your rate and monthly payment.
Discount Points vs. Origination Points
Don't confuse discount points with origination points. They sound similar but serve completely different purposes.
Discount points are optional. You choose to pay them to buy down your rate. They directly reduce your interest rate.
Origination points are a lender fee for processing your loan. They're part of the lender's revenue and don't reduce your rate. An origination fee of 1 point (1% of the loan) is fairly common.
When comparing loan offers, look at the APR. It folds both types of points into the total cost, giving you a clearer picture of the actual deal.
Negative Points (Lender Credits)
Here's something many borrowers don't know: you can also go in the opposite direction. Instead of paying points to lower your rate, you can accept a higher rate in exchange for the lender covering some of your closing costs. These are sometimes called "negative points" or "lender credits."
For example, instead of 6.5% with no credits, you might choose 6.75% and receive a $3,200 credit toward closing costs. Your monthly payment goes up by about $53, but you need thousands less cash at closing.
This can make sense if you're tight on closing funds or if you plan to refinance soon. Why pay for a low rate today if you're going to trade it in within a couple of years?
Run the Break-Even Math First
Discount points are a tool for reducing your mortgage rate by paying interest upfront. The math is simple: divide the cost by the monthly savings to find your break-even point. If you'll keep the loan past that point, buying points saves you money.
For most borrowers, the decision comes down to two questions: How long will you keep this loan? And do you have the cash available without straining your finances? If the answers are "a long time" and "yes," buying a point or two is one of the most straightforward ways to save on your mortgage over the long run.