What discount points are
A discount point is a fee paid at closing to lower the interest rate. One point costs 1% of the loan amount: $3,200 on a $320,000 loan. Points are prepaid interest. You pay some of the interest up front, and in return each month's interest is lower for the life of the loan. How much a point lowers the rate isn't fixed. It depends on the lender, the loan and the day's pricing, so the only way to know is to ask for quotes at different point levels. The CFPB's guide to points and lender credits explains how lenders present them.
Some lenders also offer the reverse, lender credits: a higher rate in exchange for money toward closing costs. This calculator compares points only. To weigh a credit, compare how many months of the higher payment it would take to use up the credit against how long you'll keep the loan.
How the calculator decides when points pay off
For every month from closing, the calculator adds up what each quote has cost you so far (the points, then every payment) plus what you'd still owe. That's what each choice has cost you if you sold or refinanced that month. A quote with points breaks even the first month its total drops below quote A's.
The common shortcut divides the cost of the points by the monthly saving. It's easy but a little pessimistic. It leaves out that a lower rate also pays down principal faster, so you owe less if you leave early. The calculator counts both.
An example
Take a $320,000, 30-year loan quoted three ways (the rates are examples, not today's market):
- A: no points at 6.75%, a payment of $2,075.51.
- B: 1 point ($3,200) at 6.5%, $2,022.62 a month: $52.89 less. It breaks even after 4 years. The shortcut would say about 5 years ($3,200 ÷ $52.89).
- C: 2 points ($6,400) at 6.25%, $1,970.30 a month: $105.21 less. It also breaks even after 4 years.
How long you keep the loan decides it. After 3 years, B is about $790 behind A and C about $1,580 behind: the points haven't paid for themselves yet. After 7 years, B is about $2,430 ahead and C about $4,850. After 15 years it's about $8,680 and $17,290. If you keep the loan all 30 years, C saves about $31,500.
Points and the APR
The APR (annual percentage rate) folds the points and the lender's fees into a single yearly rate, spread over the whole term. In the example, B's 6.5% rate has an APR of 6.597% and C's 6.25% an APR of 6.442%. Because it assumes you keep the loan to the end, the APR flatters points if you'll move or refinance sooner. It's a good way to compare quotes of the same kind, but the break-even month and "ahead after" figures are the better guide to whether points suit you.
The main mortgage calculator shows the APR of any loan too. Enter points and lender fees under “Points and lender fees”, and it includes FHA, VA or USDA fees and mortgage insurance as well. How we calculate explains the method.
When points tend to make sense, and when they don't
- You'll keep the loan a long time. The longer you stay past the break-even month, the more the lower rate saves. If there's a real chance you'll sell or refinance within a few years, points rarely pay back.
- Rates might fall. If you'd refinance when rates drop, the points you paid on this loan are lost at that point.
- Cash is tight. Money spent on points isn't available for the down payment, reserves or repairs. A bigger down payment can also lower the payment, and it can remove PMI.
- Compare like with like. Get quotes for the same loan on the same day, with the same lock period. A quote can look cheaper only because it carries more points.
Common questions
How much does one point lower the rate?
There's no set amount; it varies by lender, loan type and market conditions. Ask each lender for its rate at zero, one and two points, and compare those quotes here.
Are points the same as origination fees?
No. Discount points buy a lower rate. Origination and other lender fees pay for making the loan and don't change the rate. Both count toward the APR. Your Loan Estimate lists them separately, in section A.
Can I pay points on a refinance?
Yes. The refinance calculator takes points and shows how they change the break-even month for the refinance itself.
Are points tax-deductible?
They can be, as mortgage interest, if you itemize, and the rules differ between buying and refinancing. The calculator doesn't estimate taxes; check IRS Publication 936 or a tax professional.
Should I use the APR or the break-even to decide?
Use both. The APR is a quick way to compare quotes with different fees. The break-even month and the savings after the years you'll really keep the loan tell you whether paying points up front is worth it for you.