Discount points — commonly called mortgage points or simply "points" — are upfront fees paid to the lender at closing to permanently reduce the interest rate on a mortgage. Each point costs 1% of the loan amount and typically reduces the rate by approximately 0.125% to 0.25%, depending on the lender, market conditions, and loan type. Points are essentially prepaid interest — you pay more upfront to pay less each month for the life of the loan.
The math behind points is straightforward. On a $350,000 loan, one point costs $3,500. If that point reduces the rate from 7.0% to 6.75%, the monthly principal and interest payment drops from approximately $2,329 to $2,271 — a savings of $58 per month. The break-even point — when your accumulated monthly savings equal the upfront cost — is $3,500 ÷ $58 = approximately 60 months, or 5 years. If you plan to keep the loan longer than 5 years, buying the point saves money overall. Over the full 30-year term, the total savings would be about $17,380.
You can typically buy fractional points as well — 0.5 points, 1.5 points, etc. The more points you buy, the lower the rate, but the returns diminish with each additional point. Lenders set their own pricing for points, so it pays to compare offers. Also note that "origination points" (a fee for processing the loan) are different from "discount points" (a fee to reduce the rate). Both are expressed as percentages of the loan amount but serve different purposes.
Discount points are generally tax-deductible in the year they are paid for a primary residence purchase. For a refinance, the points must be deducted over the life of the loan (amortized). Seller-paid points — where the seller agrees to pay points as a concession to the buyer — can also reduce the buyer's rate. The tax treatment of points can be complex, so consult with a tax professional for your specific situation.
Points appear on the closing disclosure as part of the buyer's closing costs, under "Origination Charges." The disclosure distinguishes between discount points and origination fees so borrowers can see exactly what they are paying and why. At Beycome Title, our settlement team ensures every charge on your closing disclosure is accurate and clearly explained. Use Beycome's mortgage calculator to compare payments with and without points, or get your free closing quote.