A lender offers you two versions of the same loan. One at the quoted rate. One at a lower rate, if you pay a few thousand dollars up front. That up-front payment is a discount point, and deciding whether to take the trade is one of the more tractable decisions in a mortgage — it's arithmetic, not judgement.

What a point is

One discount point costs 1% of the loan amount and buys a reduction in your interest rate. On a $400,000 loan, one point is $4,000.

How much rate you get per point is not fixed. It varies by lender, loan type, market conditions, and your credit profile. You cannot assume a standard reduction — you have to read the specific offer in front of you. Points are also frequently sold in fractions.

Two things often confused with discount points:

  • Origination points are a fee for making the loan. They don't buy you a lower rate. Same unit, entirely different thing.
  • Lender credits are the mirror image of discount points — the lender pays some of your closing costs in exchange for a higher rate. Same dial, turned the other way.

The break-even calculation

This is the whole decision. Divide what the points cost by the monthly payment saving, and you get the number of months until the purchase pays for itself.

Break-even months = cost of points ÷ monthly payment saving

If a point costs $4,000 and lowers your payment by $100 a month, you break even at 40 months — a little over three years. Stay in the loan longer than that and you're ahead. Sell or refinance sooner and you've lost money.

You can work out both payments with any mortgage calculator: run the loan at the higher rate, run it again at the lower rate, and take the difference.

The comparison most people get wrong

The simple break-even above uses payment savings. It's a good first filter, but it slightly understates the case for points, because part of each payment is principal — money you keep, not money you spend.

The more honest comparison is total interest paid over the period you actually expect to hold the loan, plus the cost of the points, for each version. That accounts for the fact that a lower rate also changes how quickly you build equity.

A stricter version accounts for what the points money could have earned elsewhere. If paying points means not funding an emergency reserve or a matched retirement contribution, the true comparison isn't points-versus-nothing — it's points versus the best alternative use of that cash.

The question that actually decides it

Everything reduces to one thing: how long will you keep this exact loan?

Not how long you'll own the house — how long you'll hold this loan. Selling ends it. So does refinancing. Median homeownership tenure is a poor guide for any individual, so use your own circumstances: job stability, family plans, whether the home suits you for a decade or is a stepping stone.

Points make sense when you're confident you'll hold well past break-even. They're a poor bet when you might move within a few years, when you took an adjustable-rate loan you expect to exit, or when rates are widely expected to fall and refinancing looks likely.

That last case deserves emphasis. Paying points to lower a rate you may refinance away within two years is close to setting the money on fire.

When points are a good idea

  • You're staying put. A long, confident horizon is the core condition. Everything else is secondary.
  • You have cash beyond your reserves. Points should come from surplus, never from your emergency fund or the cushion a lender wants to see after closing.
  • The seller is paying. Seller concessions can often be directed toward a rate buydown. If someone else's money buys the points, the break-even question largely dissolves.
  • You need to hit a payment threshold. A lower payment can improve your debt-to-income ratio enough to qualify. Here points are buying approval, not just savings.

When lender credits are the better trade

Run the logic backwards and lender credits become attractive precisely when points don't: you're short on cash to close, you might move or refinance within a few years, or you'd rather keep the money liquid.

You accept a higher rate and the lender covers part of your closing costs. You pay more per month, but you keep cash now. For a buyer stretched at closing — which is most first-time buyers — that's frequently the better trade, and it's under-discussed relative to points.

Comparing offers honestly

Points make lender comparison harder, because a quoted rate means little without knowing what was paid for it. A lender advertising a notably low rate may be quoting it with two points built in.

  • Compare at the same points level. Ask every lender for a zero-point quote as a baseline, then ask what buying down costs. Now you're comparing like with like.
  • Use the Loan Estimate. It's standardised specifically so that fees and points are visible and comparable across lenders.
  • Check whether points are refundable. Generally they aren't. If you refinance a year later, that money is gone.
  • Ask about tax treatment. Deductibility of points depends on your circumstances and whether you itemise — worth a question to a tax professional rather than an assumption.

The bottom line

A point costs 1% of the loan and buys a rate reduction that varies by lender. Divide the cost by the monthly saving to get your break-even month, then ask honestly whether you'll hold this loan past it.

Long horizon and spare cash: points are reasonable. Short or uncertain horizon, or tight on closing funds: take the zero-point loan, or consider lender credits instead. And never let a low advertised rate persuade you before you've checked what was paid to get it.