Mortgage Points
Upfront fees paid to a lender at closing to reduce the loan's interest rate.
What is Mortgage Points?
Mortgage points, also called discount points, are prepaid interest paid to a lender at closing in exchange for a permanently reduced interest rate on the loan. Each point equals 1% of the loan amount, and paying one point typically reduces the interest rate by 0.125–0.25 percentage points, though the exact trade-off varies by lender and market conditions. Borrowers use a break-even analysis to determine whether paying points makes financial sense: divide the upfront cost by the monthly payment savings to find how many months it takes to recoup the cost. Points make sense for borrowers who plan to stay in the home long enough to pass the break-even point. Points paid on a primary residence purchase mortgage are generally tax-deductible in the year paid, subject to IRS rules.
Example
A borrower taking a $400,000 mortgage can pay 2 points ($8,000) to reduce the rate from 7.0% to 6.625%. The monthly payment savings is approximately $92. Break-even is $8,000 ÷ $92 = 87 months (about 7.3 years). If the borrower plans to stay beyond 7.3 years, paying points saves money; if they plan to move sooner, it does not.
Source: Consumer Financial Protection Bureau — Mortgage Points