A mortgage point is a fee equal to 1% of the loan amount, paid at closing to lower the interest rate, and its break-even month is the point at which the monthly savings have paid that fee back. On a $350,000 loan, one point costs $3,500. Depending on how much rate that point buys, the break-even month in the examples below falls between month 48 and month 119, so the same fee can be a good deal for one borrower and a loss for another.
Key takeaways
- One point equals 1% of the loan amount ($3,500 on $350,000), and lenders can sell fractions of a point, such as 0.125.
- The simple break-even divides the fee by the monthly payment savings. The fuller method also counts the extra principal a lower rate pays down, and in the examples below it lands 12 to 23 months earlier.
- How much rate a point buys is the number that decides everything. At 0.25 percentage points per point, the example breaks even near 4 to 5 years; at 0.125, near 8 to 10 years.
- Selling or refinancing before the break-even month loses money on the points. The tax deduction, where it applies, softens that loss but does not remove it, because a lower rate also leaves less interest to deduct.
- A lender credit is a negative point: the lender pays part of closing costs in exchange for a higher rate, and the same break-even math applies in reverse.
What a discount point is
The Consumer Financial Protection Bureau (CFPB) describes discount points as a way to pay more at closing in exchange for a lower interest rate. One point is 1% of the loan amount, so it is $1,000 on a $100,000 loan, and points can be fractional: 0.125 points is $125 on that same loan.
The rate cut per point is not fixed by any rule. It varies by lender, loan type and day, which is why every figure below that depends on it is labeled as an assumption. The CFPB's own example shows the scale: on a $180,000 30-year loan at 5.0%, paying 0.375 points ($675) gets a 4.875% rate and a payment about $14 lower each month. That is a rate cut of 0.125 percentage points for 0.375 points, or about 0.33 percentage points of rate per point paid.
Points on the Loan Estimate
Points appear on page 2 of the Loan Estimate and the Closing Disclosure, in Section A (origination charges), according to the CFPB's points and credits explainer. Federal rule 12 CFR 1026.37 requires points paid to the lender to be itemized separately in that section, as a percentage of the loan and as a dollar amount, under the label "% of Loan Amount (Points)." A blank line means no points are being charged on that quote.
Page 3 of the Loan Estimate also has an "In 5 Years" comparison with two lines. Under the same rule, the first totals the principal, interest, mortgage insurance and loan costs scheduled to be paid through the 60th month, and the second shows the principal paid off by then. Read them together. A lower-rate loan pays off more principal, so the totals alone understate what the points save. In the example below, the two totals differ by only about $34, the "payments only" figure. Subtracting the principal paid off ($19,913 at 7.18% versus $20,787 with one point) gives the $907 "with balance" figure. Quotes from different lenders also differ in other fees, so the points are isolated only when one lender quotes the same loan with and without them.
Two break-even methods
Both methods start from the same inputs. The assumptions used here: a $350,000 30-year fixed loan, a 7.18% base rate with zero points (the Freddie Mac Primary Mortgage Market Survey 30-year average for the week of November 5, 2026), principal-and-interest payments only, and two assumed price lists. Treating the survey average as a zero-point rate is itself an assumption, because Freddie Mac does not report average points. In Scenario A each point lowers the rate by 0.25 percentage points; in Scenario B, it lowers it by 0.125.
Simple break-even
Break-even months = Points cost / (P&I at base rate - P&I at reduced rate)
- Points cost - points times 1% times the loan amount, here 1 point × 1% × $350,000 = $3,500
- P&I - the monthly principal-and-interest payment from the standard amortization formula
At 7.18%, the payment is $2,371.02. Scenario A (6.93%) gives $2,312.13, a saving of $58.89 a month, so the simple break-even is $3,500 / $58.89 = 59.4 months, which means the first month where the points are fully repaid is month 60. Scenario B (7.055%) gives $2,341.50, a saving of $29.52, so $3,500 / $29.52 = 118.6 months, or month 119.
Full break-even
The simple method ignores something real: with a lower rate, less of each payment goes to interest and more reduces the balance. After 60 months, the 7.18% loan still owes about $330,087, while the 6.93% loan owes about $329,213, a difference of $874. That money is not in your pocket each month, but it is equity you recover when you sell, refinance or pay the loan off.
Net gain at month n = (Cost of base loan at n) - (Cost of reduced-rate loan at n)
Cost at n = Points + (n x monthly P&I) + Remaining balance at month n
- n - the month you sell, refinance or pay off the loan
- Remaining balance - what you would still owe at month n, which is where the faster paydown shows up
Counted this way, Scenario A breaks even in month 48 instead of 60, and Scenario B in month 96 instead of 119. The full method comes down to a simpler test: the points pay off in the month when the total interest saved first exceeds the points cost. It is the better guide if you expect to sell or refinance at a specific date, because the lower balance is paid out of the sale. It leaves out what the $3,500 could have earned elsewhere, which pushes the real break-even later, so treat both months as a minimum hold, not a precise answer.
Hold periods and early exits
Break-even by hold period
Illustrative example: one point ($3,500) on the $350,000 loan above, with the net result shown at three holding periods. Positive numbers mean the points came out ahead; negative numbers mean they cost money. "Payments only" is the simple view (payment savings minus the fee); "with balance" adds the lower remaining balance.
| Hold period | A: payments only (6.93%) | A: with balance | B: payments only (7.055%) | B: with balance |
|---|---|---|---|---|
| 5 years | +$34 | +$907 | -$1,729 | -$1,296 |
| 7 years | +$1,447 | +$2,679 | -$1,020 | -$409 |
| 10 years | +$3,567 | +$5,323 | +$42 | +$915 |
The pattern is what matters. When a point buys 0.25 percentage points, a five-year hold barely recovers the cost on payments alone and gains $907 once the balance is counted, and the gain grows steadily after that. When a point buys 0.125, the borrower is still behind after seven years, and ten years only just clears the fee on payments alone. Two points at the same price list scale everything linearly (twice the cost, twice the monthly saving), so the break-even month barely moves.
Selling or refinancing early
Break-even is a deadline, and leaving before it means the points were a net cost. Using the full method at 0.25 percentage points of rate per point, selling or refinancing in month 24 leaves the borrower $1,744 behind, and month 36 leaves them $862 behind. At 0.125, month 36 leaves them $2,181 behind. Past the break-even month, each additional month adds about $74 in Scenario A: the $58.89 payment saving plus about $15 of extra principal paid down.
Refinancing resets the clock in a second way: a new loan with new points starts its own break-even count from zero. If rates fall enough that a refinance is likely within a few years, paying points on the current loan is the riskier choice. The same logic applies to anyone who expects to move, which makes the "most likely time you expect to keep the loan" the most useful number to estimate honestly. The CFPB suggests asking the lender to compare total costs over the shortest, longest and most likely timeframes.
Lender credits as negative points
Lender credits work in the opposite direction: you accept a higher rate and the lender pays part of your closing costs. The CFPB notes lenders may call them "negative points," and they show up as a negative number on the Lender Credits line in Section J of page 2.
The math mirrors points. Taking a credit of 1% ($3,500) at a rate 0.25 percentage points higher (7.43%) raises the payment by $59.47 a month, which uses up the credit in about 59 months. In the full count, that credit costs $912 more than the zero-point loan at 5 years, $2,689 more at 7 years and $5,346 more at 10 years. At 0.125 (7.305%), the credit comes out ahead by $1,295 at 5 years and $407 at 7 years and costs $920 more at 10 years. A credit suits a borrower who expects to leave early or needs cash at closing, and it is a poor trade for someone staying put.
Points and taxes
Points paid on a mortgage may be deductible, but only for borrowers who itemize on Schedule A. The IRS Topic 504 and Publication 936 (the 2025 edition) allow deducting points in full in the year paid when all of these tests are met:
- The loan is secured by your main home and is used to buy or build it.
- Paying points is an established practice in your area, and the amount is not above what is generally charged there.
- You use the cash method of accounting.
- The points are not paid in place of items normally listed separately on the settlement statement, such as appraisal or title fees.
- The funds you bring to closing, plus any points the seller paid, at least equal the points charged, and you did not borrow those funds from the lender or broker.
- The points are figured as a percentage of the loan principal and clearly shown on the settlement statement.
Points on a refinance generally are not deducted in full in the year paid. They are spread over the life of the loan. The exception is the share tied to loan money used to substantially improve the main home, which can be deducted in the year paid if the tests above other than the buy-or-build, percentage and settlement-statement tests are met and the points were paid with your own funds. If the loan ends early, any remaining balance of those points can be deducted in the year it ends, except when you refinance with the same lender, in which case it carries into the new loan's term. Points on a second home cannot be fully deducted in the year paid; they are spread over the loan. Points on a mortgage above the debt cap in Publication 936 cannot be fully deducted either: $750,000 ($375,000 if married filing separately), or $1 million ($500,000 if married filing separately) for debt taken on before December 16, 2017.
Whether any of this matters depends on whether your itemized deductions exceed the standard deduction. For an itemizer who deducts purchase points in the year paid, the tax rules shrink gains and losses rather than moving the full break-even month. The points cost less after tax, but the interest saved is also interest you can no longer deduct, so both sides scale down at the same bracket. In the examples, the full break-even stays at month 48 and month 96 at brackets from 12% to 32%, ignoring when the tax savings arrive. This article is general education, not tax, legal or lending advice. A tax professional can apply these rules to a specific return.
Frequently asked questions
Can a point be less than 1%?
Yes. The CFPB says points can be fractions, for example 0.125 points, which is $125 on a $100,000 loan. On a $350,000 loan, 0.125 points would be $437.50.
Who gets the deduction when the seller pays my points?
Publication 936 treats seller-paid points as if the buyer paid them. The buyer deducts them in the year paid if all the tests are met, otherwise over the life of the loan, and must reduce the home's basis by that amount.
Can I deduct points if I borrowed the money to pay them?
Often, yes. The IRS test looks at the funds you provided at or before closing, plus any seller-paid points, which must at least equal the points charged. Those funds do not have to be applied to the points. A down payment, earnest money or an escrow deposit counts, but money borrowed from the lender or broker does not. If your own funds fall short, Publication 936 lets you deduct points in the year paid up to the amount you provided and spread the rest over the life of the loan.
What happens to deducted refinance points if I refinance again?
If you are deducting the points over the loan's life and the mortgage ends through payoff, refinancing or foreclosure, you can generally deduct the remaining balance in that year. If you refinance with the same lender, the balance instead carries over and is deducted over the new loan's term.
Is a lower rate guaranteed once I pay the points?
Not automatically. The CFPB's mortgage shopping guidance says to make sure you actually get a lower interest rate in exchange for the extra points you pay. Compare the Loan Estimate with and without points, and check that the rate and the points line match what you were quoted.
Checklist for comparing offers
- Request the same number of points or credits, as the CFPB advises, so the quotes are comparable.
- Ask each lender for a list of current interest rates for its available loans, the fees it normally charges for each loan product, and whether the quoted rates are the lowest for that day or week.
- Get Loan Estimates from at least three lenders and read Section A for points and Section J for credits.
- Divide the points cost by the monthly P&I saving for the simple break-even. As a check, compare the page 3 "In 5 Years" totals minus the principal paid off on quotes from the same lender.
- Compare the break-even month with the most likely time you will keep the loan, and walk away from the points if the two are close.
Sources
- CFPB: What are discount points and lender credits and how do they work?
- CFPB: Finding the best loan when shopping for a home mortgage
- eCFR: 12 CFR 1026.37, content of disclosures (Loan Estimate)
- Freddie Mac: Primary Mortgage Market Survey
- IRS: Topic no. 504, Home mortgage points
- IRS: Publication 936, Home Mortgage Interest Deduction
