The short answer
- A point costs 1% of the loan. On $400,000, that is $4,000.
- If it cuts a 7.25% rate to 7%, the payment falls by $67.50 a month. The cost is repaid in 60 months, or 48 counting the faster paydown.
- Keep the loan 10 years and one point leaves you $6,091 ahead; leave after 3 years and you are $985 behind.
- Points on a home purchase are usually deductible in the year paid, but only if you itemize.
What discount points are
Discount points are prepaid interest. You pay the lender a lump sum at closing, and in return it gives you a lower rate for the life of the loan. One point is 1% of the loan amount; you can often buy fractions, such as half a point or 0.125 of a point. The CFPB describes them as a trade: more cash now for a lower payment later.
How much a point cuts the rate
There is no fixed exchange rate. Each lender prices points daily, and the cut varies with the loan type, the market and how far below the “par” rate you go. About 0.25 of a percentage point per point is a common rule of thumb, which is the calculator’s default, but your Loan Estimate shows the real trade. Ask each lender for the rate with no points and with one or two points so you can compare.
A worked example
- Cost of 1 point1% of $400,000$4,000
- New rate7.25% − 0.257.00%
- Payment with no points$2,728.71
- Payment with 1 point$2,661.21
- Monthly saving$67.50
The break-even month
The usual test divides the cost by the monthly saving: $4,000 ÷ $67.50 = 59.3, so the points pay for themselves in the 60th month, five years after closing. Sell or refinance before then and you lose money; stay longer and every month after is a gain.
The fuller break-even
The simple test misses one thing. With a lower rate, more of each payment goes to principal, so you owe less when you leave, and you get that back when you sell or refinance. Counting it, the example breaks even after 48 months rather than 60. The calculator shows both, and its chart plots savings so far, including the lower balance, against the cost.
How long you will keep the loan
| Years kept | 1 point | 2 points | 1 point lender credit |
|---|---|---|---|
| 3 | −$985 | −$1,971 | +$983 |
| 5 | +$1,038 | +$2,071 | −$1,044 |
| 7 | +$3,065 | +$6,117 | −$3,076 |
| 10 | +$6,091 | +$12,155 | −$6,117 |
| 15 | +$10,991 | +$21,912 | −$11,057 |
| 30 | +$20,298 | +$40,353 | −$20,535 |
This is the deciding number. Many people sell or refinance within ten years, often sooner than they expect. If there is a fair chance you will move, or that rates will fall enough to refinance, a long break-even is a bet against yourself.
Comparing several options
| Option | Rate | Cost | Payment | Net after 10 years |
|---|---|---|---|---|
| No points | 7.25% | $0 | $2,728.71 | – |
| 0.5 point | 7.125% | $2,000 | $2,694.87 | +$3,049 |
| 1 point | 7.00% | $4,000 | $2,661.21 | +$6,091 |
| 2 points | 6.75% | $8,000 | $2,594.39 | +$12,155 |
| 3 points | 6.50% | $12,000 | $2,528.27 | +$18,189 |
When each point buys the same cut, every option breaks even at the same month, and more points simply magnify the gain or the loss. In real pricing the cut per point often shrinks as you buy more, so compare the actual offers row by row.
When the rate cut is small or large
The cut per point matters more than anything. On the example loan, a point that buys only 0.125 takes 119 months, nearly ten years, to break even and gains just $1,049 over ten years. One that buys 0.375 breaks even in 40 months and gains $11,127.
Lender credits: negative points
Lender credits run the other way. The lender pays part of your closing costs, and you accept a higher rate. One point of credit on the example loan gives you $4,000 at closing and a 7.5% rate, adding $68.15 a month. The credit stays ahead for about four years (48 months, counting the slower paydown); after that, it costs you. Credits suit buyers short of cash at closing and those who expect to move or refinance soon.
Points on a 15-year loan
On a shorter loan, a rate cut saves less each month because the balance falls faster. One point on $400,000 at 6.6% over 15 years saves $54.93 a month and takes 73 months to break even (51 counting the lower balance). It leaves you $4,335 ahead after ten years, against $6,091 on the 30-year loan.
Tax: points on a purchase
Points are mortgage interest for tax purposes. On a loan to buy or build your main home, you can usually deduct them in full in the year you pay them, if you itemize and meet the IRS tests: the points are a percentage of the loan, shown on the settlement statement, normal in your area, and paid from your own funds, not borrowed from the lender (IRS Topic 504). In the 22% bracket, $4,000 of points saves about $880 of federal tax in the first year; in the 24% bracket, about $960.
Only if you itemize
Most households take the standard deduction ($32,200 for married couples filing jointly in 2026). For them, points bring no tax saving at all. The deduction also falls under the $750,000 mortgage debt cap.
Tax: points on a refinance
Points paid to refinance are deducted evenly over the life of the new loan. $4,000 on a 30-year refinance gives about $133 of deduction a year, worth about $29 a year in the 22% bracket. If you sell or refinance again, you can deduct the part not yet deducted in that year. The refinance calculator checks whether the refinance itself pays off.
Seller-paid points
In a slow market you can ask the seller to pay for points as a concession. You get the lower rate without using your own cash, and the IRS lets the buyer deduct seller-paid points too, but you must reduce the home’s cost basis by the same amount. Loan programs cap seller concessions, often at 3% to 6% of the price, so check with your lender.
Points or a bigger down payment
- Lowers
- The rate
- Gets back
- Only if you stay
- Best for
- Long stays
- Lowers
- The balance
- Gets back
- As equity when you sell
- Best for
- Avoiding PMI
Cash spent on points is gone if you leave early; cash added to the down payment stays as equity. If extra cash would take you to 20% down and remove PMI, that usually beats points. Keep a cash cushion for repairs too. The mortgage calculator shows the PMI side.
Points when rates may fall
Freddie Mac’s survey put the average 30-year rate at about 7.3% on October 1, 2026. If you think rates could fall enough to refinance within a few years, points are risky: the refinance resets the clock and the money is lost. If rates are already low and you plan to stay, points lock in a lower cost for decades.
Discount points vs origination fees
Not every “point” lowers your rate. An origination fee, sometimes quoted in points, is the lender’s charge for making the loan and buys nothing. Only discount points reduce the rate. On the Loan Estimate, both sit in section A, Origination Charges, labeled separately. Compare offers on the APR, which counts all of them.
Reading the Loan Estimate
Page 2, section A lists “% of loan amount (points)” with the dollar cost. Page 1 shows the rate and the monthly principal and interest. Ask lenders for estimates on the same day, with the same lock period, for a no-points rate and a one-point rate. The difference in payment, divided into the difference in cost, is your break-even. The amortization calculator shows the full schedule at either rate.
A quick checklist
- How long will you realistically keep this loan?
- What rate cut does each point buy on your actual offer?
- Is the break-even comfortably shorter than your stay?
- Would the cash do more as a down payment, an emergency fund or debt repayment?
- Do you itemize? If not, ignore the tax side.
Using the calculator well
Enter the loan amount, the rate with no points and the term. Add the points you are offered and the rate cut each one buys, then how long you expect to keep the loan. The answer gives the break-even month; the table compares half a point to three points and a lender credit. Under More options, say whether the loan is a purchase or a refinance and whether you itemize to see the tax value.
Key numbers
| Item | Figure |
|---|---|
| Cost of 1 discount point | 1% of the loan amount |
| Common rate cut per point | about 0.25 of a percentage point (varies by lender) |
| Simple break-even | Cost of points ÷ monthly saving |
| Points on a main home purchase | Usually deductible in the year paid, if you itemize |
| Points on a refinance | Deducted over the life of the loan |
| Average 30-year rate (October 1, 2026) | about 7.3% |