A discount point is a fee equal to 1% of the loan amount, paid at closing, in exchange for a lower interest rate for the life of the loan. It is prepaid interest.
The arithmetic
On a $400,000 loan, one point is $4,000.
Suppose that buys the rate from 6.75% down to 6.50%:
- Payment at 6.75%: $2,594
- Payment at 6.50%: $2,528
- Monthly saving: $66
- Break-even: $4,000 ÷ $66 = 61 months, about 5.1 years
Keep the loan longer than 5.1 years and you profit. Sell or refinance sooner and you lost money.
The honest question
Not “is the lower rate better” — it obviously is, in isolation. The question is how long will you actually hold this specific loan?
Not how long you will own the house. How long until you sell or refinance. A refinance ends the loan you bought points on, and the unrecovered portion is simply gone.
Median tenure is far shorter than people predict when standing in a mortgage office. If you are honestly uncertain, that uncertainty argues against points.
Diminishing returns
Points are not linearly priced. The first point might buy 0.25%; the second often buys only 0.125%. Ask for the full pricing grid — rate at zero points, one point, two points — and calculate break-even at each. Sometimes one point is excellent and two is poor.
When points make sense
- Long, confident hold — a forever home, a long-term rental
- You have cash beyond reserves that would otherwise sit idle
- Rates are historically low and refinancing is unlikely to help later
- The DTI reduction from a lower payment is what gets you approved
When they do not
- Short or uncertain horizon
- The cash would be better used reducing LTV below 80% to eliminate PMI — usually a far better return
- You would be depleting reserves
- Rates are elevated and a refinance in the next few years seems plausible
A comparison worth running
Before buying points, check whether the same money applied to your down payment would push you below an LTV threshold. Moving from 82% to 80% LTV eliminates PMI entirely and improves your rate adjustment — frequently a better return than the points would deliver.
The points calculator gives you the break-even month and a plain verdict.
Negative points
The mirror image: lender credits. You accept a higher rate and the lender pays some of your closing costs. Sensible when cash to close is your binding constraint, or when you expect to refinance soon and will not hold the higher rate long.
Common questions
It varies daily and by programme. Roughly 0.125% to 0.25% per point is typical, but it is not fixed and the second point often buys less than the first.
Points on a purchase of a primary residence are often deductible in the year paid; on a refinance they generally must be amortized over the loan term. Consult a tax adviser.
General information, not advice on your specific situation. Guidelines, limits and pricing change, and vary by lender, programme and state. Nothing here is a commitment to lend or an offer of credit. For tax or legal questions, consult a qualified professional.
Sree Basireddy · Mortgage Loan Officer, NMLS 2705737 · Loan Factory, Inc., NMLS 320841 · Equal Housing Opportunity