In interest rates, a point is a unit equal to 1 percent of a loan amount. The term shows up most often in mortgage lending, where it can mean one of two very different things: a discount point, which is prepaid interest you pay at closing to lower your rate, or an origination point, which is the lender’s fee for processing the loan. On a $300,000 mortgage, one point equals $3,000 either way. In the wider world of finance, you will also hear about “basis points,” which are a much smaller unit used to describe rate changes on bonds, central bank policy, and other debt.
Discount Points on a Mortgage
A discount point is money you pay upfront to reduce the interest rate on your loan. Each point costs 1 percent of the amount you are borrowing and typically shaves about 0.25 percentage points off your rate. Buying one point on a 6.75 percent loan, for example, would usually bring the rate down to roughly 6.50 percent. Lenders often sell fractional points too: half a point on a $300,000 mortgage would cost $1,500 and lower the rate by about 0.125 percentage points.
The dollar figure is based on the loan amount, not the price of the home. If you put $60,000 down on a $360,000 house, points are calculated on the $300,000 you actually borrow. You will see any discount points you agree to listed under the origination charges on your Loan Estimate and again on your Closing Disclosure at settlement.1Consumer Financial Protection Bureau. Closing Disclosure Explainer Federal law requires lenders to deliver the Loan Estimate within three business days of your application, which gives you a written basis for comparing offers side by side.2Consumer Financial Protection Bureau. 12 CFR Part 1026 Regulation Z – Content of Disclosures for Certain Mortgage Transactions (Loan Estimate)
Origination Points
Not every point on your paperwork buys down your rate. Origination points are what the lender charges to process, underwrite, and fund the loan. They are compensation for the work of putting the mortgage together and do nothing to lower your interest rate. Like discount points, they appear under origination charges on your Closing Disclosure.3Consumer Financial Protection Bureau. 12 CFR Part 1026 Regulation Z – Content of Disclosures for Certain Mortgage Transactions (Closing Disclosure)
Origination fees are often around 1 percent of the loan amount, though the number depends on the lender and how much room you have to negotiate. Borrowers with strong credit and competing offers can sometimes get the fee reduced or waived. Some lenders advertise loans with no origination fee, but they usually recover the difference by raising the interest rate.
If you are financing with a VA-guaranteed home loan, federal regulations cap the origination fee at 1 percent of the loan amount, and a lender charging that flat fee cannot pile additional processing or underwriting charges on top of it.4eCFR. 38 CFR 36.4313 – Charges and Fees
Basis Points, the Smaller Unit
Outside mortgage closing documents, “point” often gets used more loosely, and this is where basis points come in. A basis point is the smallest standard increment for measuring interest rate changes: one basis point equals 0.01 percent, and 100 basis points make one full percentage point.5Investor.gov. Basis Point When the Federal Reserve raises its benchmark rate by a quarter of a percent, financial professionals describe that as a 25-basis-point hike.
The precision matters. If a rate moves from 4 percent to 5 percent, that is one percentage point of increase, but it is also a 25 percent jump relative to the starting rate. Saying “100 basis points” strips out the ambiguity. You will run into the phrase in bond yields, adjustable-rate mortgage indexes, and credit card rate disclosures.
Are Discount Points Worth Paying?
Paying for discount points only works out if you keep the loan long enough to recover the upfront cost through lower monthly payments. The math is simple: divide the cost of the points by the monthly savings they produce. If one point costs $4,000 and drops your payment by $133 a month, you break even in about 30 months. Every month after that is savings.
The window varies with the rate environment and the size of the loan. When home prices are high, break-even can stretch to five years or longer. A shorter break-even period, generally around five years or less, tends to favor buying points. Sell or refinance before you hit that date and you lose money, because the upfront cost was never fully recouped.
A few questions can sharpen the decision:
- How long do you realistically expect to stay in the home? If you are likely to move within a few years, points rarely pay off.
- Might you refinance? A drop in rates could pull you out of the loan before the break-even date.
- Do you have the cash without draining your reserves? Spending thousands on points and arriving at closing with no cushion is its own kind of risk.
Lender Credits Work the Other Direction
Lender credits are the mirror image of discount points. Instead of paying money upfront to lower your rate, you accept a higher rate and the lender gives you cash toward closing costs.6Consumer Financial Protection Bureau. How Should I Use Lender Credits and Points (Also Called Discount Points)? You might agree to 5.125 percent instead of 5.00 percent, for example, and receive $675 to apply at settlement.
The trade is clear: less to pay now, more to pay each month for the life of the loan. Credits tend to make sense when you expect to move or refinance soon, because the higher payments do not have long to catch up with the closing-cost savings. If you are genuinely uncertain how long you will keep the loan, a zero-point, zero-credit loan sits in the middle.6Consumer Financial Protection Bureau. How Should I Use Lender Credits and Points (Also Called Discount Points)?
Tax Treatment of Points
Discount points paid when you buy your primary home are generally deductible in the year you pay them, provided you meet the IRS conditions. The loan has to be for buying, building, or improving your main home; paying points must be an established practice in your area; the amount cannot exceed what lenders in your area typically charge; you must pay for them with your own funds rather than borrowed money; and the charge has to be shown on your settlement statement, calculated as a percentage of the loan and clearly labeled as points.7Internal Revenue Service. Topic No. 504, Home Mortgage Points
The deduction sits within the overall mortgage interest deduction cap. For loans taken out after December 15, 2017, you can deduct interest on up to $750,000 of mortgage debt, or $375,000 if you are married filing separately.8Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction
Points paid to refinance an existing mortgage are handled differently. Rather than deducting the full amount in the first year, you spread the deduction evenly over the life of the new loan; on a 30-year refinance, that means one-thirtieth of the points each year.7Internal Revenue Service. Topic No. 504, Home Mortgage Points
One boundary worth flagging: origination points are a fee for services, not prepaid interest, and are not deductible the way discount points are. If your Closing Disclosure lumps several charges under “origination,” only the portion that is a true percentage-of-loan discount point clearly labeled as such qualifies.