Mortgage Points (Discount Points)

A discount point costs 1% of the loan amount and is paid at closing in exchange for a lower interest rate — commonly about a quarter of a percentage point per point, though the exchange rate varies by lender and by market conditions. Fractions of a point are usually available.

Whether points are worth buying is a break-even calculation: divide the upfront cost by the monthly payment saving to get the number of months before you come out ahead. Keep the loan past that point and you win; sell or refinance before it and you have simply paid extra.

The break-even is often five to seven years, which is longer than many owners keep a given loan. Because the typical mortgage ends in a sale or a refinance well short of thirty years, points pay off less frequently than the sales pitch implies.

Discount points are not the same as origination points, and lenders quote both. Origination points are the lender's fee for processing the loan and buy you nothing; only discount points reduce the rate. Both appear on the Loan Estimate, and both are folded into the APR — which is part of why APR is the more honest comparison figure.

On a purchase of a primary residence, points are generally deductible in the year paid if you itemize. On a refinance they must be deducted gradually across the life of the new loan, which substantially reduces their near-term value.