Mortgage Discount Points: How They Work and Tax Rules

What a discount point is

The CFPB describes points as a trade-off: you pay more up front and receive a lower interest rate, so you pay less over time.

• 1 point = 1% of the loan amount.
• Points do not have to be round numbers. The CFPB gives examples of 1.375 points ($1,375), 0.5 points ($500) and 0.125 points ($125) on a $100,000 loan.
• Points are paid at closing and added to your closing costs (see closing costs explained).
• By law, points listed on the Loan Estimate and the Closing Disclosure must be connected to a discounted interest rate.

Some lenders call any fee calculated as a percentage of the loan “points”, so ask each lender how a fee affects your rate.

How much does one point lower the rate?

There is no standard figure. The CFPB says the reduction “depends on the specific lender, the kind of loan, and market conditions.” The only way to know is to ask each lender for the rate at zero points and at one point on the same day.

For context, Freddie Mac’s Primary Mortgage Market Survey used to report the average fees and points paid with its weekly rate. Its last reading, for November 10, 2022, was 0.9 point on a 30-year fixed loan averaging 7.08%. Freddie Mac has not published a points average since, and its weekly rates (30-year fixed 7.24% for October 29, 2026) carry no points figure.

Break-even: when points pay off

Break-even (months) = cost of the points ÷ monthly payment saving.

Hypothetical example, not a quote: a $400,000, 30-year fixed loan. Suppose a lender offers 7.24% at zero points, or 6.99% for 1 point ($4,000), a cut of 0.25 point chosen only for illustration.

The monthly saving is $67.47. Break-even: $4,000 ÷ $67.47 ≈ 59 months, just under 5 years. Sell or refinance before then and the point costs more than it saved; keep the loan longer and you come out ahead (ignoring what the $4,000 could have earned elsewhere). If the same point cut the rate by less, break-even would come later.

A worked example from the CFPB

The CFPB uses a $180,000, 30-year fixed-rate loan at 5.0% with zero points. These figures are the CFPB’s illustration, not current market rates.

Simple arithmetic on this example: $675 ÷ $14 per month is about 48 months before the lower payment has repaid the points.

Lender credits: points in reverse

Lender credits work the other way. You accept a higher interest rate and the lender pays part of your closing costs. On a lender’s worksheet they may be called “negative points”. They appear as a negative number on page 2, Section J of the Loan Estimate or Closing Disclosure. Credits make sense if you expect to sell or refinance before the break-even month.

How to compare offers with points

The CFPB recommends these steps:

1. Ask for the same number of points or credits from each lender. Pricing structures differ, so comparing a 1-point offer with a 0-point offer is misleading.
2. Ask for two versions (with and without points or credits) and the total cost over several timeframes: the shortest, the longest and the most likely period you will keep the loan.
3. Check page 2, Section A of each Loan Estimate for the points actually charged.

If you do not know how long you will stay or when you may refinance, the CFPB notes that paying points may not be worthwhile. If you may refinance, include that timeframe in the comparison.

Points on an adjustable-rate loan. The CFPB’s handbook on ARMs warns that paying points on an ARM often lowers the rate only until the end of the initial period, not over the life of the loan. Compute the break-even against the fixed period (60 months on a 5-year ARM), not the full term. See adjustable-rate mortgage and mortgage rates explained.

Tax treatment of points (IRS Topic 504 and Publication 936)

The IRS treats points as prepaid interest. You can only deduct them if you itemize on Schedule A (Form 1040). For the broader rules, see the mortgage interest deduction.

General rule: spread over the loan. Points to obtain a new mortgage, to refinance, or on a loan secured by a second home are generally deducted ratably over the term of the loan. Publication 936 gives this example: $4,800 of points on a $100,000, 20-year loan, with 3 payments in the first year, gives a first-year deduction of $60 ($4,800 ÷ 240 months × 3), then $240 in a full year of 12 payments. Applied to the $4,000 point above on a 30-year loan: $4,000 ÷ 360 = $11.11 per month, or $133.33 for a full year.

Exception: full deduction in the year paid. Publication 936 lets you deduct points in full in the year paid if all nine tests are met:

1. the loan is secured by your main home;
2. paying points is an established business practice in the area;
3. the points are not more than those generally charged there;
4. you use the cash method of accounting;
5. the points were not paid instead of amounts normally stated separately on the settlement statement (appraisal, inspection, title, attorney fees, property taxes);
6. the funds you provided at or before closing, plus any seller-paid points, were at least equal to the points charged, and were not borrowed from your lender or mortgage broker;
7. you use the loan to buy or build your main home;
8. the points were computed as a percentage of the principal;
9. they are clearly shown as points on the settlement statement.

Loans above the debt limit. Publication 936 says you can’t fully deduct points on a mortgage that exceeds the home acquisition debt limits: $750,000 ($375,000 if married filing separately) for debt incurred after December 15, 2017, or $1 million for older debt.

Refinancing. Points paid to refinance are generally not deductible in full in the year paid, even when the new loan is secured by your main home. The part related to substantially improving your main home can be an exception.

Seller-paid points. The buyer treats them as if the buyer paid them and reduces the home’s basis by that amount. The seller cannot deduct them and treats them as a selling expense.

Early payoff. If you were spreading points and the mortgage ends early, you can deduct the remaining balance that year. If you refinance with the same lender, you deduct the remaining balance over the term of the new loan instead.