Mortgage Points Explained: How to Find Your Break-Even Point Before You Pay Them, With Worked Examples

Paying points trades cash at closing for a smaller monthly payment. Whether that trade pays off depends mostly on one number: how long you keep the loan.

What are mortgage points, and when do they pay off?

Mortgage points, also called discount points, are an upfront fee paid to the lender for a lower interest rate. One point costs 1% of the loan amount. They pay off only if you keep the loan long enough for the monthly savings to exceed what you paid. Sell or refinance before then, and you lose money.

The Consumer Financial Protection Bureau puts it plainly: "One point equals one percent of the loan amount." On a $100,000 loan, one point is $1,000. Points can also come in fractions, so 0.125 points on that loan would be $125. They are paid at closing and added to your other closing costs.

The CFPB calls points "a tradeoff between your upfront costs and your monthly payment." The IRS describes them as "a form of prepaid interest," which is a helpful way to think about it. You are paying some of the interest now, in one lump, so you pay less of it every month for the life of the loan.

What a point buys is not fixed. According to the CFPB, how much your rate drops "depends on the specific lender, the kind of loan, and the overall mortgage market." Sometimes the rate cut per point is large, and sometimes it is small. The only way to know is to get quotes, which is why the examples below use made-up but realistic numbers rather than a rule of thumb.

Worked example: the simple break-even

Let's say you are borrowing $300,000 on a 30-year fixed-rate mortgage. Your lender quotes two options. This is a hypothetical example to show the math, not a current rate quote.

Option A has no points at 6.75%. The principal and interest payment is about $1,945.79 a month.

Option B has one point, costing $3,000, at 6.50%. The principal and interest payment is about $1,896.20 a month.

Option B saves about $49.59 a month. To find the simple break-even, divide the upfront cost by the monthly savings: $3,000 divided by $49.59 is about 60.5 months, or roughly five years. If you expect to keep this mortgage longer than about five years, the point starts paying for itself. If you might move or refinance within five years, it probably costs you more than it saves.

The same math works for two points. Suppose two points, or $6,000, buys a 6.25% rate with a payment of about $1,847.15. That saves about $98.64 a month versus Option A, and $6,000 divided by $98.64 also comes out to about 61 months. In this example, each point buys the same rate cut, so the break-even barely changes. In real quotes it often does change, so run the numbers for each option a lender gives you.

A more precise break-even: count the lower balance, too

The simple method only compares monthly payments, which slightly understates the benefit of a lower rate. With a lower rate, more of each payment goes to principal, so your loan balance also shrinks faster. If you sell or refinance, that smaller balance is money you keep.

We ran the full math for the example above, adding up the payments made plus the remaining balance owed at each point in time. Counting the faster paydown, the one-point option pulls ahead after about 48 months, a full year sooner than the simple 60-month estimate. Here is how far ahead or behind the one-point option is, compared with no points, depending on how long you keep the loan:

• Keep it 3 years: about $742 behind. You paid $3,000 and have not saved enough yet.
• Keep it 5 years: about $770 ahead.
• Keep it 7 years: about $2,279 ahead.
• Keep it 10 years: about $4,525 ahead.
• Keep it the full 30 years: about $14,852 ahead, the difference between roughly $400,486 and $382,633 in total interest.

The two-point option in our example roughly doubles each of those figures in both directions: about $1,485 behind at three years and about $9,027 ahead at ten. Bigger bets on points raise both the potential savings and the potential loss.

These figures ignore two real-world factors. First, money spent on points could have earned interest elsewhere or stayed in an emergency fund. Second, a lower rate gives you a smaller tax deduction if you itemize. Both push the true break-even a little later, so treat the estimate as a floor, not a finish line.

Lender credits: the same trade in reverse

Lender credits work the other way. The CFPB says they "lower your closing costs up front, in exchange for a higher interest rate," and that they might show up as "negative points" on a lender's worksheet. A $1,000 credit on a $100,000 loan is the same as negative one point.

Going back to our $300,000 example, suppose the lender offers a $3,000 credit toward closing costs if you take 7.00% instead of 6.75%. The payment rises to about $1,995.91, or about $50.11 more each month. That extra cost catches up with the $3,000 credit in about five years by the simple method, and in about four years once you count the slower paydown. A credit can make sense for someone who is short on cash at closing or who expects to sell or refinance within a few years. Over a full 30 years in this example, it would cost about $15,000 more than the no-credit loan.

The CFPB's Loan Estimate guide suggests that if you see a lender credit, you can ask whether a similar loan exists with a lower rate and no credit. The point is to see each option side by side.

How to compare points on your Loan Estimate

The CFPB says points appear on your Loan Estimate and Closing Disclosure "on page 2, Section A," and lender credits show up as a negative number in Section J. It also notes that, by law, points listed there must be connected to a discounted interest rate, so a fee labeled as points should actually lower your rate.

Here is a five-step check you can use before deciding:

1. Ask for at least two quotes from the same lender, one with no points and one with points, on the same loan type and lock date. The CFPB notes that paying points lowers your rate compared with a zero-point loan at the same lender.
2. Find the monthly savings. Subtract the lower principal-and-interest payment from the higher one.
3. Divide the cost of the points by the monthly savings. That is your simple break-even in months.
4. Remember that the simple method runs a little long. In our example, counting the faster paydown moved the break-even about a year earlier. For a closer number, ask the loan officer for a total-cost comparison at several time frames.
5. Compare the break-even with your honest plans. The CFPB suggests comparing costs over "the shortest amount of time, the longest amount of time, and the most likely amount of time" you expect to keep the loan.

Thinking about the shortest case matters because life changes. A job move, a growing family or a drop in rates that makes a refinance attractive can all cut a mortgage's life short. The CFPB says points "can be a good choice if you plan to keep your loan for a long time," and that you may not want them if you are unsure how long you will stay. Our guide to when to refinance your mortgage covers how refinancing changes the math, since points paid on a loan you replace are not refunded.

Are mortgage points tax-deductible?

Sometimes. The IRS treats qualifying points as home mortgage interest, which helps only if you itemize deductions on Schedule A instead of taking the standard deduction. Many households take the standard deduction, so for them points bring no tax benefit at all.

For points paid on a loan to buy, build or improve your main home, IRS Topic 504 lists conditions for deducting them in the year you pay them. In short, the loan must be secured by your main home, paying points must be an established practice in your area and not more than is generally charged there, the points must be figured as a percentage of the loan and shown clearly on the settlement statement, and you must bring at least that much of your own money to closing rather than borrowing it from the lender or broker.

Points that do not meet those tests, including points on most refinances and on second homes, are generally deducted gradually over the life of the loan instead of all at once. IRS Publication 936 notes one exception for refinances: if part of the money was used to substantially improve your main home, the points tied to that part may be deductible in the year paid. The IRS also says fees such as appraisal fees, notary fees and mortgage insurance premiums can't be deducted as points, even if they appear nearby on the form. Tax rules change and depend on your situation, so check the current IRS guidance or a tax professional before counting on a deduction.