Discount Points

Discount points are an optional fee paid at closing to "buy down" your interest rate. Each point costs 1% of the loan amount and typically reduces your rate by approximately 0.25%.

Discount points are pure prepaid interest — you're paying upfront for a lower rate over the life of the loan. Whether they make financial sense depends entirely on how long you'll hold the loan.

How discount points work

On a $400,000 loan:

• 1 point = 1% of $400,000 = $4,000 paid at closing
• 2 points = 2% of $400,000 = $8,000 paid at closing
• 0.5 points = $2,000 paid at closing (partial points are allowed)

Each point typically reduces your rate by 0.25%, though the exact amount varies by lender and loan program. Larger point purchases sometimes have diminishing returns (the 3rd point may only buy down 0.20%, etc.).

The breakeven calculation

Discount points only make sense if the monthly savings recoup the upfront cost over your hold period.

Breakeven = Cost of points ÷ Monthly payment savings

Example on a $400,000 loan:

• Cost of 1 point: $4,000
• Monthly payment savings from 0.25% rate reduction: ~$70
• Breakeven: $4,000 ÷ $70 = 57 months (~4.75 years)

If you hold the loan 5+ years, points pay off. If you sell, refinance, or pay off the loan in less time, you've paid more upfront than you saved.

When discount points make sense

Long-term holds. If you're buying a forever home or a long-term rental you intend to hold 7+ years, points typically pay back several times over.

Locked-in low-rate environments. When current rates are historically favorable, points lock in even better pricing. The extra savings compound over a 30-year loan.

You have excess cash at closing. If you're flush at closing and the alternative is putting cash in a low-yield account, discount points can be a better return on capital than savings rates.

When discount points DON'T make sense

Short-term holds. If you'll sell or refinance within 3 years, points usually don't break even. You've paid for savings you won't fully realize.

You expect to refinance soon. If rates are likely to drop and you'll refinance in 1-2 years, points are wasted — the new loan starts fresh.

Tight cash at closing. If buying points means using emergency reserves or stretching financially, the rate reduction isn't worth the liquidity loss.

Investment properties with shorter expected hold. If your strategy involves BRRRR refinances within 6-12 months or fix-and-flip turnover, points on the acquisition loan rarely pay back.

Discount points vs. larger down payment

If you have extra cash at closing, you have a choice: use it for points or for a larger down payment.

• Points: Lower rate. Lower monthly payment. Same loan balance.
• Larger down payment: Lower loan balance. Lower monthly payment. Same rate.

The math depends on your specific scenario, but generally: larger down payment wins for short-term holds (lower balance pays down faster); points win for long-term holds (compounding rate savings).

Run both scenarios. The right answer changes case by case.

Tax treatment

Discount points on a primary residence purchase are generally tax-deductible as mortgage interest in the year paid. On refinances, points must typically be deducted ratably over the loan term. On investment properties, points are deductible against rental income (Schedule E).

Always consult a CPA for your specific tax situation, but the deductibility can shift the breakeven math meaningfully.

Rate Hero's take

Discount points are a tool, not a default. We run the breakeven calculation on every scenario where points are an option — showing you exactly how many months it takes to recoup the cost given your loan amount, the rate reduction available, and the hold period you're planning. For long-term primary residences and stable rentals, points often pay back many times over. For short-hold investment scenarios, you usually want the cash for the next deal instead.