Paying points means handing the lender cash at closing in exchange for a lower interest rate for the life of the loan. It can be one of the best returns available to a homeowner, or money you never earn back. The difference comes down to one number: how long you keep the loan. This guide shows how to find your break even point, how points are taxed and when a temporary buydown makes more sense.
Quick answer
One mortgage point costs 1% of the loan amount and lowers your rate by an amount that varies by lender and by day. To decide, divide the cost of the points by the monthly payment savings. In our $400,000 example, 1.5 points ($6,000) that lower the rate from 7.00% to 6.625% save about $100 a month, so they pay for themselves in about five years. Points make sense when you expect to keep the loan well past that break even point and still have healthy savings after closing. If you might sell or refinance sooner, skip them or consider a seller paid temporary buydown instead.
What are mortgage points?
Discount points are prepaid interest. Each point equals 1% of your loan amount, so one point on a $400,000 loan costs $4,000. In return, the lender lowers your interest rate. How much the rate drops per point is not fixed. It depends on the lender’s pricing that day, the loan program and your own credit and down payment, so the only reliable way to know is to see the same loan priced with and without points.
Points can also run in reverse. A lender credit is negative points: you accept a slightly higher rate and the lender pays part of your closing costs. That trade can make sense when you are short on cash or expect to refinance soon.
Watch the wording: Discount points buy down your rate. An origination fee is a charge for making the loan and does not lower the rate. Both appear in Section A of your Loan Estimate, so check which one you are looking at.
How do you calculate the break even point on mortgage points?
Divide the cost of the points by the monthly savings in principal and interest. The result is the number of months it takes for the lower payment to repay what you spent at closing.
| $400,000, 30 year fixed (example pricing) | No points | 1.5 points |
|---|---|---|
| Interest rate | 7.00% | 6.625% |
| Cost of points at closing | $0 | $6,000 |
| Monthly principal and interest | $2,661 | $2,561 |
| Monthly savings | None | $100 |
| Simple break even | Not applicable | About 60 months |
The simple method ignores two things that work in opposite directions. A lower rate also pays your balance down slightly faster, which helps the points. The $6,000 could have stayed in savings or investments, which hurts them. Looking at interest actually saved, net of the points, gives a fuller picture.
| If you keep the loan for | Interest saved | Net result after the $6,000 in points |
|---|---|---|
| 3 years | $4,519 | $1,481 behind |
| 5 years | $7,546 | $1,546 ahead |
| 7 years | $10,574 | $4,574 ahead |
| 10 years | $15,084 | $9,084 ahead |
These rates are illustrations, not a quote. Your own offer may show a larger or smaller rate reduction per point, which moves the break even point in either direction.
When are mortgage points worth it?
Points reward time. They tend to work best when all of the following are true:
- You expect to keep the loan well past break even. Think about both moving and refinancing. Either one ends the loan and forfeits the remaining benefit.
- Rates are unlikely to fall enough to refinance soon. Average 30 year rates were about 6.30% a year ago and about 7.03% in late September 2026. If rates drop meaningfully, a refinance would erase the value of points paid today.
- You still have a strong cash cushion after closing. Money spent on points cannot be pulled back out in an emergency.
- Someone else may pay. In some markets sellers or builders will pay points as a concession, which changes the math entirely.
Points are usually a poor fit when you expect to move within a few years, when your cash after closing would fall below three to six months of expenses, or when the choice is between paying points and making a larger down payment on a loan with mortgage insurance. In that last case, reaching a lower loan to value bracket can save more.
Want to see your own break even?
David can price your loan with and without points and show the month each option comes out ahead.
Are mortgage points tax deductible?
Often, but only if you itemize deductions. Under IRS rules, points paid on a loan to buy or build your main home can generally be deducted in full in the year you pay them when several conditions are met, including that the loan is secured by that home, paying points is an established practice in your area, the points are computed as a percentage of the loan and they are clearly shown on your settlement statement. Points the seller pays for you can qualify too.
Points on a refinance, or on a loan for a second home, are generally deducted gradually over the life of the loan. If part of a refinance pays for substantial improvements to your main home, that share of the points may be deductible in the year paid. If the loan ends early through a sale or a refinance with a different lender, you can usually deduct the remaining balance that year.
The catch is the standard deduction, which is $32,200 for married couples filing jointly and $16,100 for single filers in 2026. If your mortgage interest, points, state and local taxes and charitable gifts do not add up to more than that, the points bring no tax benefit and the decision rests on the break even math alone. Ask your tax professional how points fit your own return.
What is a 2/1 temporary buydown?
A temporary buydown lowers your payment for the first years of the loan instead of for its whole life. With a 2/1 buydown, the rate is 2 percentage points below the note rate in year one and 1 point below in year two, then returns to the note rate for the remaining term. The difference is paid up front into an account that supplements your payments.
| $400,000 at a 7.00% note rate | Rate paid | Monthly principal and interest |
|---|---|---|
| Year 1 | 5.00% | $2,147 |
| Year 2 | 6.00% | $2,398 |
| Years 3 to 30 | 7.00% | $2,661 |
In this example, the buydown account needs about $9,300. Temporary buydowns are most useful when a seller or builder funds them, because the buyer gets payment relief during the first two years and keeps the option to refinance if rates fall. Key rules for conventional loans sold to Fannie Mae:
- You must qualify at the full note rate, not the reduced first year rate.
- They are allowed on principal residences and second homes, for purchases and limited cash out refinances, but not on investment properties or cash out refinances.
- The reduction can be at most 3 percentage points, can rise no more than 1 point per year and can last no more than three years.
- When a seller, builder or agent pays for it, the cost counts toward the interested party contribution limits below.
| Occupancy | Combined loan to value | Maximum seller or interested party contribution |
|---|---|---|
| Principal residence or second home | Above 90% | 3% of price or value, whichever is lower |
| Principal residence or second home | 75.01% to 90% | 6% |
| Principal residence or second home | 75% or less | 9% |
| Investment property | Any | 2% |
How should you compare offers with different points?
- Request the same loan priced several ways. Ask for zero points, one point and a lender credit option, all on the same day, loan amount and lock period.
- Compare Section A of each Loan Estimate. That is where points and origination charges appear, so you can see the true cost of each rate.
- Calculate break even for each option. Divide the added cost by the monthly savings, then compare it with how long you realistically expect to keep the loan.
- Check your cash after closing. Make sure reserves and your emergency fund survive the extra cost.
- Ask about concessions. If the seller is offering credits, decide whether they work harder as points, as a temporary buydown or toward closing costs.
If you are still deciding on the loan term itself, our comparison of the 15 year and 30 year mortgage shows how term and rate work together.
Frequently asked questions
How much does one mortgage point cost?
One point costs 1% of the loan amount. On a $400,000 loan, one point is $4,000 and two points are $8,000. Points can also be bought in fractions, such as half a point.
How much does a point lower your interest rate?
There is no fixed amount. The reduction per point depends on the lender’s pricing, the loan program, market conditions that day and your credit and down payment. Compare the same loan priced with and without points to see the actual trade.
How long does it take to break even on mortgage points?
Divide the cost of the points by the monthly savings. In our example, $6,000 of points that save $100 a month break even in about 60 months. If you sell or refinance before then, you lose money on the points.
Can the seller pay for my mortgage points?
Yes, within limits. Seller paid points and buydowns count as interested party contributions, which for a conventional loan on a primary home range from 3% to 9% of the price depending on your down payment, and 2% on an investment property.
Are points better than a temporary buydown?
Points lower the rate for the life of the loan and suit borrowers who plan to keep the loan for many years. A temporary buydown lowers the payment only for the first one to three years and suits buyers who want early payment relief and may refinance if rates fall, especially when the seller pays for it.
David Arvidson, MBA, CFP®
Founding partner of ARBOR Financial Group, helping clients finance homes since 1996. MBA, University of Notre Dame. CFP® professional since 2013.
NMLS #298701
DRE #01236224
Licensed in 21 states and DC
Deciding whether to pay points?
See the break even math on your own loan.
David Arvidson can price your loan with points, without points and with a lender credit, and show how each option fits your cash reserves and how long you expect to keep the home.
Sources and official resources
- IRS Topic 504: Home mortgage points
- IRS Publication 936: Home Mortgage Interest Deduction
- IRS: Tax inflation adjustments for tax year 2026
- Fannie Mae Selling Guide: Temporary interest rate buydowns
- Fannie Mae Selling Guide: Interested party contributions
- Freddie Mac: Primary Mortgage Market Survey
- CFPB: How should I use lender credits and points?
Information checked September 27, 2026. Rates, loan limits, tax rules and program guidelines change, so confirm current terms before you rely on them.
This article is for general education only and is not a loan offer, commitment to lend, or individualized investment, tax or legal advice. Rates, terms, fees and programs vary by lender and are subject to change without notice. All loans are subject to credit approval, underwriting guidelines and property eligibility. Examples are illustrations, not quotes or predictions. David Arvidson, NMLS #298701, DRE #01236224. ARBOR Financial Group is a DBA of The Turnkey Foundation Inc., NMLS #236669 (NMLS Consumer Access). Equal Housing Opportunity. CFP® and CERTIFIED FINANCIAL PLANNER® are certification marks owned by Certified Financial Planner Board of Standards, Inc.
