›What is one mortgage discount point?
One point equals 1% of your loan amount, paid at closing. On a $400,000 loan, one point costs $4,000. In exchange, the lender permanently lowers your interest rate — typically by about 0.125% to 0.25%, though the exact reduction depends on the lender and current market conditions.
›How do I know if buying points is worth it?
Compare the break-even period to how long you plan to keep the loan. If you expect to stay longer than the break-even (e.g., 7 years vs. a 5-year break-even), points are worth it. If you might move or refinance sooner, the upfront cost is unlikely to be recovered.
›What is a typical rate reduction per point?
Lenders vary considerably. A common rule of thumb is 0.25% per point, but reductions of 0.125% to 0.375% are all seen in practice. Always get the exact rate-versus-points schedule from your lender before calculating break-even, because the generic rule of thumb can lead to inaccurate conclusions.
›Are mortgage points tax-deductible?
Points paid on the purchase of a primary residence are generally deductible as home mortgage interest in the year paid under IRS rules, provided you meet certain conditions (the loan is secured by your main home, paying points is an established local business practice, etc.). Points paid on a refinance must usually be deducted ratably over the loan term. Consult a tax professional for your specific situation.
›Should I buy points or put more money down?
It depends on your LTV and whether you're paying PMI. If your down payment is close to 20% (where PMI goes away), allocating cash to close that gap is usually the better use of funds. Above 20% LTV, or once PMI is gone, points become a more competitive option — model both with your specific numbers.
›What happens to my points if I refinance?
The rate reduction from points is tied to the specific loan. If you refinance, you start a new loan and lose any benefit you hadn't yet recovered from the original points. This is why break-even period relative to expected hold time is the key metric: a refinance before break-even means you paid for savings you never received.
›Can I buy a fraction of a point?
Yes. Most lenders allow fractional points such as 0.5 or 1.5. The cost scales linearly: 0.5 points on a $400,000 loan costs $2,000. The rate reduction is proportionally smaller, so the break-even period tends to be similar regardless of whether you buy a fraction or a whole point.
›How do I compare two lenders quoting different rates and points?
Request the Annual Percentage Rate (APR) from each lender, which factors in upfront costs, and then run a side-by-side break-even for each offer using your specific planned hold time. The lender with the lower APR and a break-even shorter than your horizon is generally the better deal, but the monthly payment and total interest figures should both be checked.