Mortgage points are upfront fees you pay your lender at closing, where each point equals 1% of the loan amount, in exchange for a lower interest rate over the life of the mortgage. Often called discount points, they let you "buy down" your rate by prepaying interest. Whether they save you money depends entirely on how long you keep the loan.
What Are Mortgage Points?
A mortgage point is a fee equal to 1% of your total loan amount. When you "buy points," you hand the lender a lump sum at closing and, in return, the lender shaves a small amount off your interest rate. Because a lower rate reduces every monthly payment for the entire term, the upfront cost can pay for itself many times over, but only if you hold the loan long enough.
There are two distinct kinds of points, and confusing them is a common and costly mistake:
- Discount points: Optional prepaid interest that genuinely lowers your rate. This is what most people mean by "mortgage points."
- Origination points: A fee for processing and underwriting the loan. They cost the same 1% but do not reduce your rate at all.
How Much Does One Point Lower Your Rate?
As a rough rule of thumb, one discount point lowers your rate by about 0.25 percentage points, for example from 6.50% to 6.25%. The exact figure is set by the lender and shifts with market conditions, so always ask for a side-by-side quote with and without points. You can also buy fractional points (half a point, a quarter point) for a smaller reduction and a smaller upfront cost.
How Mortgage Points Work: A Worked Example
Suppose you take a $300,000, 30-year fixed mortgage. The lender offers 6.50% with no points, or 6.25% if you buy two discount points.
- Cost of two points: 2% × $300,000 = $6,000 paid at closing.
- Payment at 6.50%: about $1,896 per month (principal and interest).
- Payment at 6.25%: about $1,847 per month.
- Monthly savings: roughly $49.
To find your break-even point, divide the upfront cost by the monthly savings: $6,000 ÷ $49 ≈ 122 months, or just over 10 years. If you keep this loan longer than 10 years, the points save you money; if you sell or refinance sooner, you lose money on the deal. Test your own numbers with our mortgage calculator to compare payments at different rates.
The Break-Even Formula
- Break-even (months) = Total cost of points ÷ Monthly payment savings
- Compare that figure to how long you realistically expect to keep the mortgage.
- Remember that refinancing or selling resets the clock, so a long break-even is risky if rates are volatile.
When Buying Mortgage Points Makes Sense
Points reward patience. They are most attractive when you plan to stay put and hold the same loan for a long time. Consider buying points when:
- You expect to keep the mortgage well past the break-even point, often 5 to 10 years or more.
- You have enough cash at closing that paying for points will not drain your emergency fund or down payment.
- Rates are relatively high and you want to lock in long-term savings.
- You are not likely to refinance soon, which would wipe out the benefit.
If you are torn between a bigger down payment and a future rental, a simple rent vs. buy calculator can help you weigh how long you'll truly stay in the home, which is the single most important input for the points decision.
When to Skip Points
- You may move or refinance within a few years.
- Cash is tight and you'd rather keep reserves liquid.
- The rate reduction offered is unusually small relative to the cost.
- You could earn more by investing the cash elsewhere.
Mortgage Points in the USA vs. Canada
- USA: Discount points are common and, on a primary-residence purchase, are often tax-deductible in the year paid if you itemize. The long fixed terms (15 or 30 years) make a long break-even period realistic.
- Canada: Points are far less common because mortgages renew on short terms (often 5 years). With no mortgage-interest deduction on a personal home, points carry no tax upside, and frequent renewals make a long break-even hard to reach.
The underlying math is identical; only the tax treatment and term structure differ.
Points vs. a Bigger Down Payment
If you have extra cash, you can either buy points or increase your down payment. A larger down payment shrinks the loan balance (and may help you avoid mortgage insurance), while points lower the rate on whatever you borrow. Run both scenarios through our loan calculator to see which produces lower total interest for your timeline before committing the cash.
Related Calculators
- Mortgage Calculator – compare monthly payments with and without points.
- Loan Calculator – test total interest across different rates and terms.
- Rent vs. Buy Calculator – estimate how long you'll stay before points pay off.
For more home-financing terms defined in plain English, visit our financial glossary.
Frequently Asked Questions
What is one mortgage point worth?
One mortgage point equals 1% of your loan amount, paid as an upfront fee at closing. On a $300,000 loan, one point costs $3,000. Each discount point typically lowers your interest rate by about 0.25 percentage points, though the exact reduction varies by lender and market conditions.
Are mortgage points tax deductible?
In the USA, discount points on a primary-home purchase are generally deductible as mortgage interest in the year paid if you itemize and meet IRS rules; points on a refinance are usually deducted gradually over the loan term. In Canada there is no mortgage-interest deduction on a personal residence, so points offer no tax benefit.
When is buying mortgage points worth it?
Buying points is worth it when you will keep the loan past the break-even point, which is the upfront cost divided by the monthly payment savings. If you plan to stay in the home and not refinance for longer than the break-even period, the lower rate saves you money overall.
What is the difference between discount points and origination points?
Discount points are prepaid interest you choose to buy in order to lower your rate. Origination points are a fee the lender charges to process the loan and do not reduce your interest rate. Always check whether quoted points are discount or origination before comparing offers.