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Mortgage points, also called discount points, are an option for homebuyers looking for the lowest interest rate on their loan.
They offer a trade-off: Pay an extra fee at closing and get a lower rate over the course of your loan term.
In this post:
- What are points on a mortgage?
- How do you know if mortgage points are the right move?
- Mortgage discount points are tax-deductible
- What is the difference between mortgage points and lender credits?
- Are mortgage discount points worth it?
What are points on a mortgage?
Mortgage discount points allow you to essentially buy a lower interest rate when it comes to home loans. Here’s how it works:
- You pay the lender for a “point” — usually at 1% of your total loan amount
- In exchange, they lower your rate, typically by about 0.25% (but the exact amount varies)
A 0.25% discount might not look like a lot on paper, but over the course of a 30-year mortgage, points can mean serious savings.
On a $300,000 loan, for example — with a 20% down payment and no mortgage insurance — the difference between a 3.50% rate and a 3.25% rate would be about $33 per month and nearly $12,000 over the life of the loan.
Here’s how two home loans would look with and without points:
| Without points | With points | |
|---|---|---|
| Loan amount | $300,000 | $300,000 |
| Down payment | $60,000 | $60,000 |
| Mortgage rate | 3.50% | 3.25% |
| Monthly payment | $1,078 | $1,045 |
| Total interest paid over loan term | $147,975 | $136,018 |
| Total payments over loan term | $387,975 | $376,018 |
| Note: All numbers here are for demonstrative purposes only and do not represent an advertisement for available terms. | ||
How do you know if mortgage points are the right move?
To evaluate if mortgage points are smart for your home purchase, you’ll need an idea of how long you will stay in the home. In order for points to be worth their price, you will have to reach the breakeven point — or the point at which you save more than you spent.
In the previous example, a point would cost about $3,000. At a savings of $33 per month, it would take around 91 months (7.5 years) to break even on that $3,000.
If you don’t think you’ll be in the home that length of time, it’s probably not a smart move to buy the points.
Find Out: How to Buy a House: Step-by-Step Guide
Mortgage discount points are tax-deductible
If you do end up purchasing discount points, you can actually deduct their costs from your annual tax returns — as long as you itemize deductions.
You can deduct them for either the year you purchase the home or deduct them incrementally across your loan term, depending on various factors (including the loan purpose).
- The home you took out the loan to purchase or build must be your primary residence.
- The points weren’t more than the general average for your area.
- The points weren’t used for anything like an appraisal fee, inspection, or another charge.
- You didn’t borrow funds from your lender or broker to pay the points.
Your closing settlement statement (or “Closing Disclosure”) will also need to clearly identify the points (and their cost). Here is the full set of requirements from the IRS, but you should consult a tax professional if you’re thinking of deducting your points.
Learn More: How Much Does It Cost to Buy a Home?
What is the difference between mortgage points and lender credits?
When looking at your loan estimate, you might see two different kinds of points: mortgage points (or discount points) and lender credits.
With mortgage points, you’re paying to lower your interest rate. With lender credits, you’re agreeing to pay a higher interest rate in exchange for lowering your costs at closing.
- Mortgage points are your best bet if you know you’ll be in the home a while, as it will equate to the most in long-term savings.
- Lender credits can be a good option if you’re just looking to get in the home with the lowest upfront costs. It’s also better for short-term buyers (a higher interest rate isn’t ideal if you’ll be in the home for decades).
Here’s a quick look at mortgage points vs. lender points:
| Mortgage points | Lender credits | |
|---|---|---|
| Purpose | Lower your interest rate | Lower your costs at closing |
| Good for |
|
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Are mortgage discount points worth it?
Mortgage points can only be purchased at closing, so be ready to make a decision early in the process — both when buying a home or applying for a mortgage refinance.
Remember that points are negotiable, too, so if you’re not happy with the cost or how much a point can lower your rate, it might be worth asking your lender for a better deal.
Shopping around can also help give you a better shot at a low rate. Just keep in mind that many advertised rates already have points factored in, so pay close attention to any loan estimates you receive. Points will be noted on Page 2 of the document.
If you’re ready to get started on your mortgage rate-shopping journey, or to see what types of mortgage loans, you qualify for, Credible Operations, Inc. can help. We’ll help you compare prequalified rates from multiple lenders in just minutes.
