What Is One Point on a Mortgage: Cost, Break-Even, and Tax Rules

One point on a mortgage equals 1 percent of your loan amount, paid to the lender at closing. On a $300,000 loan, one point costs $3,000. Borrowers pay points for one of two reasons: to buy down the interest rate for the life of the loan (discount points), or to cover the lender’s cost of processing the loan (origination points). The label matters, because only one of the two changes what you pay each month, and only one is generally deductible on your taxes.¹

How to Calculate the Cost of One Point

Multiply your loan amount by 1 percent. One point on a $200,000 mortgage is $2,000. One point on a $400,000 mortgage is $4,000. You can also buy fractions of a point, so half a point on that $400,000 loan would be $2,000.¹

Points are calculated on the loan balance, not the purchase price. Buy a $500,000 house with $100,000 down, and your loan is $400,000. One point is $4,000, not $5,000. Your down payment is equity and doesn’t factor in.²

Discount Points: Paying Now to Lower Your Rate

A discount point is prepaid interest. You give the lender extra cash at closing, and the lender lowers your interest rate for the life of the loan. It’s optional. Nobody has to buy points, but borrowers planning to stay put for many years often find the long-term savings worth it.³

A common rule of thumb is that one discount point drops your rate by about 0.25 percentage points. A borrower quoted 6.0 percent might come away with 5.75 percent after paying one point. That figure isn’t fixed. Actual rate reductions depend on the lender, the loan type, and market conditions, and can run larger or smaller.¹

Here’s what that looks like in dollars. On a $400,000 loan at 6.0 percent over 30 years, your monthly principal-and-interest payment is about $2,398. Drop the rate to 5.75 percent with one point, and the payment falls to roughly $2,334. That saves about $64 a month, or more than $23,000 in interest over the full 30-year term. Whether the $4,000 upfront cost is worth it depends on how long you actually keep the loan.

The Break-Even Calculation

Divide the cost of the point by the monthly savings. A $4,000 point that saves you $64 a month breaks even at about 63 months, or roughly five years and three months. Sell or refinance before that date and you lost money on the trade. Stay past it and every month after is savings.

When one point cuts the rate by a quarter of a percent, break-even usually falls somewhere between about four and a half and six years. When the rate reduction per point is smaller, break-even can stretch well past a decade, or never arrive.

Origination Points: A Fee for Processing the Loan

Origination points are a processing charge. The lender uses them to cover the cost of evaluating your application, verifying income, and underwriting the file. They do not reduce your rate. Some lenders charge a flat origination fee instead of expressing it as points, so when you shop across lenders, compare dollar figures rather than just counting points.

Lender Credits Work the Other Direction

Lender credits flip the discount-point trade. The lender pays money toward your closing costs, and in exchange, your interest rate goes up. You’ll sometimes see this on a lender’s worksheet as “negative points.”¹

On a $180,000 loan with a base rate of 5.0 percent, paying 0.375 points ($675) might drop your rate to 4.875 percent and save about $14 a month. Taking 0.375 in lender credits instead gives you $675 toward closing but pushes the rate up to 5.125 percent and adds about $14 a month. Credits make sense when you’re short on cash at closing or don’t plan to keep the loan long enough to earn back a point purchase.¹

When you compare offers from different lenders, make sure the quotes carry the same number of points. A 5.5 percent rate with two points is not the same deal as 6.0 percent with none unless you’ve run break-even math on both.

Points on an Adjustable-Rate Mortgage

Buying discount points on an ARM works differently than on a fixed-rate loan. The lower rate applies only during the initial fixed-rate period, typically three, five, seven, or ten years depending on the product. Once the rate starts adjusting based on its index, the points no longer influence your rate. Because the benefit window is limited, buying points on an ARM is uncommon and rarely pencils out unless the fixed period is long enough to reach your break-even.

Are Mortgage Points Tax-Deductible?

Discount points are deductible as mortgage interest if you itemize on Schedule A. The IRS treats them as prepaid interest, so they fall under the mortgage interest deduction. Origination charges that stand in for other settlement costs (appraisal fees, title fees, property taxes) are not deductible.³

Purchase Loans

Pay discount points on a loan used to buy or substantially improve your primary residence, and you can generally deduct the full amount in the year you paid them. The IRS requires the points to reflect an established local business practice, to be paid with your own funds rather than borrowed from the lender, and to appear on your settlement statement as a percentage of the loan.⁴

Refinances

Points on a refinance don’t come off all at once. You spread the deduction evenly over the life of the new loan. Pay $6,000 in points on a 30-year refinance and you deduct $200 a year. One exception: if part of the refinance proceeds paid for substantial improvements to your home, the portion of the points tied to that improvement can be deducted in full the year you paid it.⁴

Second Homes and the Standard Deduction

Points on a second home can only be deducted over the life of the loan, never as a lump sum in the year paid.⁴

The bigger practical issue is the standard deduction. Itemizing only helps if your total itemized deductions exceed it. For the 2026 tax year, the standard deduction is $16,100 for single filers and $32,200 for married couples filing jointly.⁵ If your mortgage interest, points, state taxes, and other itemized items don’t clear that bar, the tax benefit of buying points is effectively zero. Mortgage interest is also limited to acquisition debt of up to $750,000 for loans taken out after December 15, 2017.⁴

Seller-Paid Points

If the seller pays your discount points as part of the deal, the IRS still treats them as if you paid them, and you take the deduction. You do have to reduce your home’s cost basis by the amount of the seller-paid points, which could affect your tax picture if you later sell at a gain.³

Where Points Show Up on Your Loan Paperwork

Federal law requires lenders to disclose point costs in two standardized forms. The Loan Estimate arrives within three business days of your application and shows what the lender plans to charge. The Closing Disclosure arrives at least three business days before closing and shows the final numbers. Origination charges and discount points both appear in the origination charges section, so you can see the dollar amount and what it’s buying.

Lender credits appear separately on page 2 of both forms, as a negative number on the lender credits line under Section J.¹

When you’re weighing loan estimates from more than one lender, look at the origination charges first. One offer might carry a lower rate paired with two points, while another has a slightly higher rate and no points. The only honest comparison is to add the upfront point cost to the total interest you’d pay over the time you actually expect to hold the loan.

1
Consumer Financial Protection Bureau. How Should I Use Lender Credits and Points (Also Called Discount Points)?
2
U.S. Bank. What Are Mortgage Points and How Do They Work?
3
Internal Revenue Service. Topic No. 504, Home Mortgage Points
4
Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction
5
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026, Including Amendments From the One Big Beautiful Bill