What Are Discount Points on a Mortgage?

A discount point is an upfront payment you make to your lender in exchange for a lower interest rate on your mortgage. One point typically costs 1% of your loan amount: on a $400,000 loan, one point is $4,000. In return, the lender reduces your rate, commonly by about a quarter of a percentage point, though the exact amount varies with market conditions and the lender.

Points are a way of prepaying interest. You spend money now, at closing or by rolling it into the loan, to lower your payment every month for as long as you keep the mortgage. Whether that trade makes sense depends entirely on how long you stay in the home.

The decision comes down to one number: the break-even point. Divide the cost of the points by the monthly savings to find the number of months it takes to get your money back. If points cost $4,000 and save you $50 a month, the break-even is 80 months, about six and a half years.

If you plan to stay in the home and keep the loan past the break-even point, points are a good investment. If you expect to sell or refinance before then, you will lose money on the points, because the benefit does not travel with you to the next loan. The break-even calculation is the whole question, and your lender can run it for any points scenario.

Points are not a fixed fee; they are a price the lender quotes, and they are almost always worth negotiating or at least comparing across lenders. One lender's quote with points can be cheaper than another's without, once you compare the total over a few years.

On a purchase mortgage, points paid at closing are generally deductible as mortgage interest in the year you buy the home. On a refinance, the deduction is spread over the life of the new loan. Your lender reports points on Form 1098, and a tax professional can confirm how they apply to your return.

The same math works in reverse. Some lenders offer a lender credit, sometimes called negative points, which raises your rate in exchange for cash toward your closing costs. That can be the right move when you want to minimize upfront cash, such as when you are low on reserves after the down payment.

The choice between points, no points, and lender credits is a spectrum of rate versus cash. Each has a break-even, and each fits a different buyer profile. A buyer who plans to move in four years should think very differently about points than a buyer who plans to retire in the home.

In a market like the Philadelphia region, where prices vary from fixer starter homes to Main Line estates, points cost differently in absolute dollars because they scale with the loan amount. One point on a $300,000 loan is $3,000; one point on an $800,000 loan is $8,000, yet the rate reduction is roughly the same.

For buyers financing larger homes in the suburbs, the same decision to buy points is a much bigger cash decision, and the break-even analysis matters even more. This is one reason I encourage buyers to compare whole loan offers, rate and points together, rather than fixating on the rate alone.

Never evaluate points in isolation; evaluate the whole loan package. Ask your lender for the rate with zero points, with one point, and with a lender credit, then run the break-even for your expected time in the home. The answer tells you which scenario is genuinely cheaper.

If you are close to retirement and plan to stay put, points can be a smart purchase. If you are early in your career or expect a job move, the flexibility of a higher rate and lower closing costs is often the better call.

Call 215-598-6848 or schedule a free consultation, and I will connect you with lenders who will show you the full rate ladder, not just the headline rate.