Short answer: discount points are money you pay the lender at closing to get a lower interest rate. One point is 1% of the loan amount. To see whether they pay off, divide the cost of the points by the monthly payment savings: that gives the number of months you need to keep the loan to get your money back. If you sell or refinance before then, the points cost more than they saved. Points to lower the rate must be listed on their own line on your Loan Estimate and Closing Disclosure. This page is general information, not legal, tax or financial advice.
What points are
The CFPB explains that points lower your interest rate in exchange for paying more at closing, that one point equals one percent of the loan amount, and that points do not have to be round numbers, for example 0.5 or 1.375 points. Lender credits work the other way: you take a higher rate and the lender pays part of your closing costs (CFPB, reviewed October 19, 2023, read October 30, 2026; this page may be out of date). The CFPB also notes that some lenders use the word “points” for any upfront fee figured as a percentage of the loan, whether or not the rate goes down, so ask what each fee buys.
Where points show on your forms
On the Loan Estimate, under “Loan Costs” and the subheading “Origination Charges”, “the points paid to the creditor to reduce the interest rate shall be itemized separately, as both a percentage of the amount of credit extended and a dollar amount”, with the label “___% of Loan Amount (Points)”. If you pay no points to lower the rate, that line must be blank (12 CFR 1026.37(f)(1)(i), eCFR, text up to date as of October 28, 2026, read October 30, 2026). The Closing Disclosure lists the same origination charges under “Origination Charges”, with columns for who paid them (1026.38(f)(1), eCFR). The CFPB says points are on page 2, Section A, of both forms, and lender credits show as a negative number in Section J (CFPB).
The Loan Estimate also has an “In 5 Years” figure: the total principal, interest, mortgage insurance and loan costs you will have paid through the 60th month, and the principal you will have paid off (1026.37(l)(1)). Comparing that figure on a with-points and a no-points Loan Estimate is one way to see the trade-off over five years. For which closing costs can go up between the Loan Estimate and closing, see Loan Estimate closing cost limits; for the final check before closing, see reviewing your Closing Disclosure.
The break-even math
This example is only for the math, with example figures, not rates or prices from any lender: a $300,000.00 fixed-rate loan over 30 years at 6.50% with no points, or at 6.25% with 1 point.
| Item | Amount |
|---|---|
| Cost of 1 point: 1% of $300,000.00 | $3,000.00 |
| Monthly principal and interest at 6.50% | $1,896.20 |
| Monthly principal and interest at 6.25% | $1,847.15 |
| Monthly savings: $1,896.20 - $1,847.15 | $49.05 |
| Break-even: $3,000.00 / $49.05 | 61.2 months, so about 62 months |
How the result depends on how long you keep the loan, with the same example figures:
| If you keep the loan | Payment savings | Savings minus the cost of the points |
|---|---|---|
| 36 months | $49.05 x 36 = $1,765.80 | $1,765.80 - $3,000.00 = -$1,234.20 |
| 60 months | $49.05 x 60 = $2,943.00 | $2,943.00 - $3,000.00 = -$57.00 |
| 120 months | $49.05 x 120 = $5,886.00 | $5,886.00 - $3,000.00 = $2,886.00 |
This simple break-even leaves out two things you may want to weigh: with the lower rate you also pay down the balance a little faster, and cash spent on points is cash you no longer have for savings or other costs. The CFPB suggests asking a loan officer for two options, with and without points, and the total cost over the shortest, longest and likeliest time you expect to keep the loan (CFPB).
How long will you keep the loan?
A sale, a refinance or paying the loan off ends the savings. The CFPB says that if you do not know how long you will stay in the home or when you will want to refinance, you might not want to pay points (CFPB). With an adjustable-rate loan, the lower rate may last only until the first rate change; see adjustable-rate mortgage reset notices.
Taxes: what IRS Publication 936 says
IRS Publication 936 (2025), for 2025 returns, says that you can deduct home mortgage interest only if you itemize deductions on Schedule A (Form 1040), that points are prepaid interest, and that you generally deduct them ratably over the life of the loan. You can fully deduct points in the year paid only if you meet all of a list of tests, for example that the loan is secured by your main home and, for that rule, that it was taken out to buy or build it. Points paid to refinance are generally not deductible in full in the year paid; if you spread points and the loan ends early, you can generally deduct the rest that year, but not if you refinance with the same lender (IRS Publication 936, page last reviewed or updated April 30, 2026, read October 30, 2026; rules for later tax years may differ). Ask a tax professional how this applies to you.
Questions to ask the lender
- What rate do I get with zero points, and with each amount of points you offer?
- Is this fee a discount point that lowers my rate, or another origination fee?
- Can I see two Loan Estimates, with and without points, so I can compare the “In 5 Years” figures?
- If my rate lock changes, do the points change too?
- Is the rate fixed for the life of the loan, or only until a first rate change?
Checklist
- One point = 1% of the loan amount.
- Find the “% of Loan Amount (Points)” line in Origination Charges, page 2, Section A.
- Break-even months = cost of points / monthly savings.
- Compare the break-even with how long you expect to keep the loan.
- For taxes, read IRS Publication 936 or ask a tax professional.
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Sources
- eCFR: 12 CFR 1026.37, Content of disclosures for certain mortgage transactions (Loan Estimate) (Regulation Z), current text up to date as of October 28, 2026
- eCFR: 12 CFR 1026.38, Content of disclosures for certain mortgage transactions (Closing Disclosure) (Regulation Z), current text up to date as of October 28, 2026
- CFPB: How should I use lender credits and points (also called discount points)? (reviewed October 19, 2023)
- IRS: Publication 936 (2025), Home Mortgage Interest Deduction
Disclosure: Modern Lending Solutions is not a lender, loan broker or agent for any lender or loan broker, and does not make credit decisions. Any compensation we receive is paid by participating lenders, only for advertising services. This guide is general information, not financial or legal advice.