What Are Points on a Home Loan
Points on a home loan are upfront fees paid to the lender at closing in exchange for a lower interest rate over the life of the mortgage. Each point typically costs 1% of the total loan amount and buys a discount of roughly 0.25% on the rate, though the exact trade-off varies by lender and market.
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How Mortgage Points Work
When you buy points, you pay more at the closing table in exchange for a smaller monthly payment. Over time, the lower rate can save thousands of dollars in interest, but only if you stay in the home long enough to break even. The break-even point is the number of months it takes for the monthly savings to equal the upfront cost.
Types of Mortgage Points
- Discount points: Prepaid interest that lowers your rate. Each point usually reduces the rate by about 0.25%, but the actual reduction depends on the lender and the loan.
- Origination points: Fees charged by the lender to cover the cost of processing the loan. These do not lower your interest rate and are not tax-deductible in most cases.
When Buying Points Makes Sense
Buying points is most beneficial for borrowers who plan to stay in the home for many years. The longer you hold the loan, the more you save from the reduced rate. If you expect to refinance or sell within a few years, the upfront cost may not be recovered.
Tax Treatment and Limits
Discount points are often fully deductible in the year they are paid, provided you itemize deductions and meet IRS rules. Origination points are generally amortized over the life of the loan rather than deducted upfront. The exact tax treatment depends on your individual tax situation and should be confirmed with a tax professional.
Key Considerations Before Paying Points
Before paying for points, compare the total cost of the loan with and without them, and confirm whether the lender allows partial point purchases. Some borrowers choose a no-point loan with a slightly higher rate to preserve cash for other closing costs or emergencies.
| Factor | Detail | Context |
|---|---|---|
| Cost per point | 1% of the loan amount | Paid at closing |
| Rate reduction | ~0.25% per point | Varies by lender |
| Break-even | Monthly savings vs. upfront cost | Determines long-term value |
| Tax deduction | Discount points often deductible | Subject to IRS rules |