At closing you will be offered the chance to pay “discount points” to lower your interest rate. One point costs 1% of the loan amount and typically buys the rate down by somewhere around a quarter of a percentage point. It is presented as a discount. It is more honestly described as prepaid interest: you hand over money today to pay less interest later.
Whether that is a good trade is not a matter of opinion or salesmanship. It is a single division problem, and once you have done it, the decision makes itself.
What a point actually is
A discount point is a fee, equal to 1% of the loan, that reduces your note rate. The exact reduction varies by lender and market — it is not fixed at a quarter-point — but a quarter-point per point is a reasonable working assumption. You can buy fractions (half a point) and multiples (two or three points).
The money buys a permanently lower rate for as long as you hold the loan. Which means the value you get depends entirely on one thing you cannot know for certain: how long that will be.
The only calculation that matters
Ignore every other framing and compute this:
That is the whole decision. If you will hold the loan past the break-even point, the points pay for themselves and then keep paying. If you will be gone before it — sold the house, refinanced the loan — you simply donated the money.
One point, two points, on a $400,000 loan
Take the house example: $400,000 over 30 years, base rate 6.50%, payment $2,528.27. Assume each point buys the rate down a quarter-point.
Buying down from 6.50%, $400,000, 30-year
Over the full thirty years, one point saves about $23,500 in interest and two points about $46,800 — but only if you keep the loan the whole time. The break-even is where the risk actually lives.
Why the break-even barely moves
Notice something in that table: buying one point and buying two points give almost exactly the same break-even — about five years. That is not a coincidence. Because both the cost and the monthly saving scale up together, the ratio between them stays roughly constant. Doubling the points doubles the cost and doubles the saving, so the break-even hardly budges.
The practical upshot: the number of points is not the real decision — the holding period is. Once you know roughly how many years you will keep this exact loan, you know whether any amount of points makes sense. If the answer is “more than about five years,” points help; if it is “fewer,” they don't, and buying more of them just loses money faster.
The bet inside the bet: will you keep this loan?
Here is the trap people fall into. They plan to stay in the house for fifteen years, so they reason the points will easily pay off, and they buy three of them. But the break-even depends on keeping this loan, not this house — and if rates fall two points over the next few years, they will refinance, extinguishing the loan they paid to buy down, long before the break-even arrives. The points evaporate.
So the real question is not “how long will I live here” but “how long will I keep this specific loan at this specific rate.” If you are buying at a moment when rates are high and widely expected to fall, paying points is doubly questionable: you are prepaying interest on a loan you are relatively likely to refinance away. Points make the most sense when you buy at a low rate you will have no reason to leave.
The tax treatment, briefly
Points are a form of mortgage interest, so they can be deductible — but only if you itemize, which most households do not. On a loan used to buy your main home, points are generally deductible in the year you pay them, subject to conditions. On a refinance, they normally must be deducted gradually over the life of the loan instead. As always with the mortgage interest deduction, the benefit is real only above the standard deduction, and for most filers that threshold is never crossed — the full picture is in the mortgage interest deduction in 2026. Do not let a possible deduction tip a points decision; run the break-even on the pre-tax numbers and treat any deduction as a small bonus.
Points in reverse: lender credits
The same machinery runs backwards. Instead of paying points to lower your rate, you can accept a higher rate in exchange for lender credits — money the lender applies toward your closing costs. This is the right move in exactly the opposite situation: when you expect to hold the loan only briefly, or when you are short on cash at closing. You pay a slightly higher rate for a short time rather than a lump sum up front.
Points and credits are two directions on one dial. Points suit a long hold at a rate you will keep; credits suit a short hold, an expected refinance, or a tight closing budget. The break-even logic decides which way to turn it — and if you are unsure how long you will keep the loan, that uncertainty itself argues against paying points.
Frequently asked questions
Are mortgage points worth it?
They are worth it if you will keep the loan past the break-even point, which is the cost of the points divided by the monthly payment reduction. On a typical loan that break-even lands around five years. Hold the same loan longer than that and points pay off; sell or refinance sooner and you lose the money.
How much does one point lower my rate?
One point costs 1% of the loan amount and typically lowers the rate by around a quarter of a percentage point — but the exact reduction varies by lender and market, so ask for the specific number rather than assuming. Always compute the break-even using the real figures you are quoted.
Should I buy points if rates might fall?
Usually not. Points only pay off if you keep the loan to the break-even, and if rates fall you are likely to refinance and extinguish that loan first. Paying to buy down a rate you are likely to leave is a poor trade. Points make the most sense on a low rate you will have no reason to refinance.
Are discount points tax deductible?
They can be, since points are prepaid mortgage interest — but only if you itemize, and most filers take the standard deduction. On a home purchase, points are generally deductible in the year paid; on a refinance, they are usually spread over the life of the loan. Run your break-even on pre-tax numbers and treat any deduction as a bonus.
What is the difference between points and lender credits?
They are opposites. Points are money you pay upfront to lower your rate; lender credits are money the lender gives you toward closing costs in exchange for a higher rate. Points suit a long hold at a rate you will keep; credits suit a short hold, an expected refinance, or a tight closing budget.
Mortgage Ledger publishes educational information, not personalized financial, legal, tax, lending, or investment advice. The figures here are estimates built on stated assumptions and will not match a lender’s underwriting exactly. Confirm any number that matters against your Loan Estimate and a licensed professional before you act on it.