What Are Discount Points, and Are They Worth It?
The short answer
Discount points are an upfront fee you pay at closing to lower your interest rate. One point equals 1% of your loan amount. Points can be worth it if you keep the loan long enough for the monthly savings to add up past what you paid. If you might sell or refinance soon, they often are not.
How points work
- The math: on a $400,000 loan, one point costs $4,000. How much it lowers your rate varies by lender and by day.
- Partial points: you can often buy fractions, like half a point.
- Who can pay: you, or sometimes the seller or builder through negotiated credits, which is one reason buydowns show up so often in North Texas new construction.
Find your break-even in three steps
- Take the cost of the points.
- Divide it by how much the lower rate saves you each month.
- The answer is how many months it takes to come out ahead.
Example only: if points cost $4,000 and save $80 a month, break-even is 50 months, a little over four years. Plan to keep the loan longer than that? Points may make sense. Shorter? Keep the cash.
Points vs. a temporary buydown
Points lower your rate for the life of the loan. A temporary buydown, such as a 2-1, lowers the payment for the first year or two only, and is usually funded by a seller or builder credit. Each fits a different situation, and it is worth comparing both when a seller is offering money toward closing.
Frequently asked questions
Are points tax-deductible?
Sometimes, depending on tax law and how the loan is used. Ask your tax professional.
Should I put extra cash toward points or my down payment?
It depends on your break-even, whether a bigger down payment removes PMI, and how much cash you want left after closing. We can lay those options side by side for you.
Want to see the trade-offs on your own numbers? Read when refinancing makes sense, call (469) 414-5554, or visit our Texas branch.
By Kelly Welton, Mortgage Broker (NMLS #314183), Mohave Mortgage Texas Branch. Mohave Mortgage NMLS #1830581 · Texas Branch NMLS #2690682 · Equal Housing Opportunity. General information only, not a commitment to lend or financial advice. Programs, rates and guidelines vary and change.
