6 Things to Know Before Paying Mortgage Points
Mortgage points are not automatically a good deal or a bad deal. They are a trade: more cash at closing for a lower interest rate. Whether that trade works depends on the exact pricing and how long you actually keep the mortgage.
Quick Answer
- One point equals 1% of the loan amount.
- There is no universal rule for how much one point lowers a mortgage rate.
- Compare zero-point and point options from the same lender on the same day.
- A simple break-even calculation shows how long monthly savings take to recover the added upfront cost.
- Lender credits generally make the opposite trade: lower upfront cost for a higher rate.
- Tax treatment depends on IRS requirements and the facts of the loan.
1. One point is 1% of the loan amount—not a guaranteed rate reduction
One point on a $400,000 mortgage costs $4,000. That part is straightforward.
The rate reduction is not. CFPB says it depends on the lender, loan type, and mortgage market.
If someone tells you one point “always” cuts the rate by 0.25 percentage point, ask for the lender’s actual zero-point and one-point quotes. The reduction is not standardized.
2. Calculate break-even from real quotes
Suppose a lender offers the same mortgage with no points or with $4,000 in points, and the point option lowers principal-and-interest payments by $70 per month.
A simple break-even calculation is:
| Item | Amount |
|---|---|
| Added upfront point cost | $4,000 |
| Monthly payment savings | $70 |
| Simple break-even | About 57 months |
That does not prove you will save money overall. Selling, refinancing, opportunity cost, and tax treatment can change the result.
3. Compare points and lender credits as opposite pricing choices
CFPB describes lender credits tied to the interest rate as the reverse of points. You accept a higher rate and the lender provides a credit that offsets closing costs.
That can make sense when preserving cash is more valuable to you than minimizing the rate.
Compare the same loan with different combinations of rate, points, and credits instead of asking only for “the best rate.”
4. Your expected loan life matters more than the 30-year label
A 30-year mortgage may last only four years if you sell or refinance.
If the points take five years to break even and you refinance in three, you did not keep the original loan long enough to reach the simple break-even point.
Base the decision on how long you realistically expect to keep this specific mortgage, not merely how long you expect to own the house.
5. The tax deduction is conditional
IRS Publication 936 explains when points may be deductible as home mortgage interest.
Points paid on a main-home purchase can qualify for deduction in the year paid only if specific IRS tests are satisfied. Otherwise, points may need to be deducted over the life of the loan. Points on a loan secured by a second home generally cannot be fully deducted in the year paid and are generally deducted over the loan term.
Do not pay points primarily because someone says they are “tax deductible.” Whether and when you receive a deduction depends on the IRS rules and your tax situation.
6. Verify the selected points on both mortgage disclosures
Points connected to the discounted interest rate appear on Page 2, Section A of the Loan Estimate and Closing Disclosure.
Check that the final points, rate, and lender credits match the option you chose before signing.
Before You Pay Mortgage Points Checklist
- Request zero-point and point options on the same day.
- Calculate the dollar cost of each option.
- Calculate a simple break-even period.
- Consider the likelihood of selling or refinancing before break-even.
- Verify the selected points on the Loan Estimate and Closing Disclosure.
- Review IRS Publication 936 or get tax advice for your circumstances.
FAQ
Does one mortgage point always lower the rate by 0.25%?
No. One point always equals 1% of the loan amount, but the interest-rate reduction varies.
Are mortgage points always immediately tax-deductible?
No. IRS rules determine whether points can be deducted in the year paid or must be deducted over time.
Are lender credits free money?
Not when they are tied to the rate. In that structure, you generally accept a higher interest rate in exchange for lower upfront costs.
Related Guides
The Bottom Line
Points are a pricing choice, not a mortgage hack. Compare the exact cost, exact rate reduction, and realistic time to break even before spending more cash at closing.