When you buy mortgage points, you pay your lender in exchange for a lower interest rate. That makes points a powerful tool for homebuyers who have cash on hand and plan to stay in the home long-term. They’re not right for everyone, though — and some lenders use points to make their advertised rates look lower than the competitions’. 

Mortgage points: A way to buy a lower interest rate

Mortgage points, also called discount points, give you a way to pay your lender to lower your interest rate. In other words, they’re a kind of prepaid interest. 

Most commonly, each point costs 1% of your loan amount. If you’re getting a $425,000 mortgage, then, the point would cost $4,250. On a $300,000 loan, a point might cost $3,000. 

In exchange for handing over that sum of money, your lender reduces your interest rate. It’s typical for mortgage points to buy a rate reduction of 0.25%.

All of this said, details on discount points vary from lender to lender. Before you decide to invest in even a fraction of a point, make sure you understand: 

• How much they cost: Is it the standard 1% of your loan amount, or does this lender have a different price for points?
• How much they buy down your rate: Is it the standard 0.25% rate reduction, or something else? Do all points reduce the rate by the same amount, or will successive points reduce your rate by less?
• How many you can buy: Is there a limit on how many points you can buy? A lot of lenders set the ceiling here at two or three points. Also, see if you can buy fractional points (like a half-point for a 0.125% rate reduction). 
• How you pay for them: Usually, you pay for points in cash at the closing table. Some lenders offer the option to roll them into your loan, though. 

A quick note on origination points

Discount points might not be the only time you see “points” as you get your mortgage. Some lenders charge for something called origination points as a way to compensate their team. Make sure you’re clear about what kind of points you’re paying for because origination points won’t bring your interest rate down at all. 

When homebuyers benefit from buying mortgage points

A lower interest rate is definitely appealing. It can save you thousands of dollars over the life of your loan. That said, buying mortgage points isn’t right for everyone. 

Generally, you should only pursue this path if these two things apply to you:

• You’re already putting 20% down and you have plenty of cash left over.
• You plan to stay in the house long-term. 

If you put less than 20% down, you’ll need to pay for private mortgage insurance (PMI), which can add hundreds of dollars to your monthly payment. As a result, it’s usually better to allocate extra cash toward your down payment than buying points. 

Even if you have ample cash on hand, points only make sense if you’ll stay in the house long enough to pass your break-even threshold. That’s the point at which you’ll have saved more in interest than you paid for the points. 

Deducting the cost of mortgage points on your taxes

If you do decide to buy mortgage points, they can come with another upside: a lower tax bill. If you itemize your deductions, the amount you paid for points can generally be deducted. 

To qualify for this tax savings opportunity, all of the following needs to be true: 

• You need to use the cash method of accounting, meaning that you report income in the year you earn it and write expenses off in the year you pay for them. 
• The points are being used to lower the rate on a mortgage to buy your primary home (not a vacation house or investment property). 
• You paid money for the points at closing (i.e., you didn’t roll the cost of the points into your loan). 
• Your settlement statement clearly shows that amount paid and the points it bought (you should be able to check this by finding the points on page 2 of your loan estimate and closing disclosure).

The IRS has a mortgage-related expense deductibility workflow you can use to confirm your points will be eligible. 

How points might affect your mortgage rate shopping — even if you don’t buy them

A lot of lenders advertise their lowest current interest rates on their websites. Before you get excited about what looks like a low rate, though, check the fine print. A lot of large lenders include points in their advertised rates. This makes the rate look lower at first glance, which can incentivize potential borrowers to choose them. 

Don’t fall for this, though. Just because that lender’s rate looks low doesn’t mean it truly is. If you’re not planning to buy discount points, you won’t be able to get a rate that low. 

So, as you’re mortgage rate shopping, make sure you read advertised rates closely. If there’s an asterisk, find where it leads. Most lenders put the fine print in the footer of the website, and it should tell you if points were included in that rate. 

Also, look for the lender’s annual percentage rate (APR), not just the interest rate. The APR takes points into account, so it’s a more accurate measure of the true cost of the loan. Comparing APRs from different lenders lets you see how the loans stack up, even if one lender’s including points and another isn’t. 

If you want to start comparing what’s on offer from different lenders, check out our mortgage rate tables. You can click “More Filters” and add points into the mix if you’re curious about this way to prepay interest. 

‍