Mortgage discount points are an upfront charge you pay at closing in exchange for a lower interest rate for the life of the loan. One point equals 1% of the loan amount, so one point on a $300,000 loan costs $3,000. How much a point lowers your rate depends on the lender, the loan type, and the market, so the useful question is your break-even: the cost of the points divided by the monthly savings, compared with how long you expect to keep the loan.
I'm Taylor Ring, a Mortgage Loan Officer with Fairway Independent Mortgage Corporation (The Wood Group) in Belton. When buyers in Temple, Belton, or Cedar Park ask whether to "buy down the rate," I show them the same loan with and without points and do the break-even math with them. This guide uses the CFPB, IRS Publication 936, and the Fannie Mae, FHA, and VA rules on who can pay points, read October 23, 2026. No rates in this article are offers or current market rates; the examples use made-up payment savings so the math is clear.
Want to see your own options with and without points? Get Pre-Approved or Book a Free Consultation.
What a Discount Point Is
The CFPB puts it simply: "Points lower your interest rate, in exchange for paying more at closing." A few details from the CFPB that buyers often miss:
- One point = 1% of the loan amount, not the price of the home.
- Points don't have to be whole numbers. The CFPB's examples include 1.375 points, 0.5 points, and 0.125 points.
- They show up on page 2, Section A of your Loan Estimate and Closing Disclosure. The CFPB says that by law, points listed there must be connected to a discounted interest rate.
- "Points" can mean other things. Some lenders use the word for any upfront fee figured as a percentage of the loan. Ask whether a charge actually lowers your rate.
- Lender credits are points in reverse. You take a higher rate and the lender credits money toward your closing costs. The CFPB says they may be called "negative points" and appear on page 2, Section J.
What Points Cost at Different Loan Amounts
| Loan amount | 0.5 point | 1 point | 2 points |
|---|---|---|---|
| $200,000 | $1,000 | $2,000 | $4,000 |
| $300,000 | $1,500 | $3,000 | $6,000 |
| $400,000 | $2,000 | $4,000 | $8,000 |
That's straight arithmetic: points times 1% of the loan amount.
How Much Does a Point Lower the Rate?
There's no fixed answer. The CFPB says the reduction "depends on the specific lender, the kind of loan, and the overall mortgage market," and sometimes each point buys a relatively large reduction while other times it's smaller. That's why I never quote a rule of thumb. The only number that matters is the one on your Loan Estimate.
What the CFPB does say you can expect: a loan with one point should have a lower rate than the same kind of loan with zero points from the same lender, and two points should be lower still.
The Break-Even Math (Hypothetical)
Break-even months = cost of points / monthly payment savings
Hypothetical example, not a rate quote: You're borrowing $300,000. One point costs $3,000. Suppose, for example, that point lowered your monthly principal and interest by $50.
- $3,000 / $50 = 60 months, or 5 years
- Keep the loan longer than 5 years, and the point pays for itself
- Sell or refinance before then, and you've spent more than you saved
Here's how sensitive that is to the savings, using the same hypothetical $3,000 cost:
| Hypothetical monthly savings | Break-even |
|---|---|
| $40 | 75 months (6.25 years) |
| $50 | 60 months (5 years) |
| $60 | 50 months (about 4.2 years) |
| $75 | 40 months (about 3.3 years) |
All figures hypothetical. Your actual savings depend on your rate, loan type, and lender pricing.
Things simple break-even leaves out:
- What else the cash could do. Money spent on points isn't available for reserves, repairs, or a bigger down payment.
- Taxes. Points may be deductible (see below), which can shorten the real break-even for some buyers.
- Refinancing. If rates fall and you refinance in year 3, the points you paid don't carry over.
The CFPB's own tip: if you don't know how long you'll stay or when you might refinance, you might not want to pay points. It suggests asking a loan officer to show options with and without points over the shortest, longest, and most likely time you'll keep the loan. That's the comparison I build. My how much house can I afford in Texas guide covers how cash to close fits your overall budget.
Points, Zero Points, or Lender Credits
| Option | Cash at closing | Rate | Tends to fit when |
|---|---|---|---|
| Pay points | Higher | Lower | You plan to keep the loan a long time and have cash to spare after closing |
| Zero points | Baseline | Baseline | You want the simplest comparison between lenders |
| Lender credits | Lower | Higher | Cash is tight and you can handle the higher payment |
The CFPB adds that when you compare lenders, ask each for the same number of points or credits so you're comparing like with like.
Who Can Pay for Points, and the Limits
You can pay points yourself, or the seller or builder can pay them as part of a negotiated credit. In the Texas resale contract (TREC No. 20-19), Paragraph 12A(1)(b) has a blank for an amount the seller pays toward the buyer's expenses, and the buyer's expense list includes origination charges and "expenses incident to any loan." How much the seller can contribute depends on your loan program:
| Loan program | Seller and other interested-party limit | How points are treated |
|---|---|---|
| Conventional (Fannie Mae) | Principal residence or second home: 3% if LTV/CLTV is over 90%, 6% at 75.01-90%, 9% at 75% or less; investment property 2%. Based on the lower of price or appraised value | Interested-party payments toward closing costs count toward the limit, including interest rate buydowns funded by an interested party |
| FHA | Up to 6% of the sales price | The 6% covers origination fees, other closing costs, prepaids, and discount points, plus interested-party payments for permanent and temporary buydowns |
| VA | Seller concessions over 4% of the reasonable value are excessive | VA says normal discount points and the buyer's closing costs are not counted toward the 4%. Points beyond what the market calls for, used for a permanent buydown, are concessions |
VA's own example: if market pricing calls for two points and the seller pays five, three of those points count as a seller concession. VA also limits financing points: on a regular purchase, discount points can't be included in the loan amount, and on an IRRRL no more than two points can be financed.
Contributions above a program's limit get treated as a sales concession or inducement, which can mean reducing the price used to figure your loan-to-value. If you're negotiating a seller credit, I'll tell you the cap for your loan before you write it into the offer. My seller closing costs in Texas and closing costs in Texas guides cover the rest of who pays what.
Are Discount Points Tax Deductible?
IRS Publication 936 treats points as prepaid interest. The general rule is that you deduct them ratably over the life of the loan. You can deduct them in full in the year paid if you meet all of the IRS tests, which include:
- The loan is secured by your main home, and you used it to buy or build that home
- Paying points is an established business practice in your area, and the points weren't more than generally charged there
- You use the cash method of accounting (most individuals do)
- The points weren't paid in place of amounts normally listed separately, like appraisal, inspection, title, or attorney fees, or property taxes
- The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points (the funds can be your down payment, earnest money, or escrow deposit, and can't be borrowed from your lender or broker)
- The points were figured as a percentage of the principal and clearly shown on the settlement statement as points
Other IRS rules worth knowing:
- Seller-paid points are treated as if you paid them, but you reduce your home's basis by that amount.
- Refinance points are generally deducted over the life of the loan, except the share tied to substantially improving your main home.
- Second homes: points can only be deducted over the life of the loan.
- If the loan ends early, you can generally deduct the remaining balance of spread points that year, unless you refinance with the same lender.
I'm not a tax advisor. Talk with a tax professional about your situation and the current year's rules.
Permanent Points vs. a Temporary 2-1 Buydown
Both lower your payment, but they work differently:
| Discount points (permanent) | 2-1 buydown (temporary) | |
|---|---|---|
| What it does | Lowers the rate for the life of the loan | Lowers the payment for the first two years only |
| How it's paid | Upfront charge at closing | Funds placed in an escrow account that subsidize early payments |
| Who usually pays | Buyer or seller | Often the seller or builder |
| Qualifying | At the reduced note rate | At the full note rate (Fannie Mae requires qualifying on the note rate without the buydown) |
| Refinances | Allowed | FHA doesn't permit temporary buydowns on refinances |
Interested-party payments for either one count toward the concession limits above. My 2-1 buydown in Texas guide covers how the temporary version works, including VA's example and Texas assistance-program rules.
A Texas Note on Home Equity Loans
If you're taking cash out with a Texas home equity loan under Section 50(a)(6), the Constitution caps certain required fees at 2% of the original principal amount. Bona fide discount points are not counted toward that cap, though other required fees are. My Texas cash-out refinance rules guide explains what is and isn't counted.
Frequently Asked Questions
What are mortgage discount points?
Mortgage discount points are an upfront charge paid at closing to get a lower interest rate for the life of the loan. One point equals 1 percent of the loan amount, so one point on a 300,000 dollar loan is 3,000 dollars. Points appear on page 2, Section A of the Loan Estimate and Closing Disclosure.
How do I know if buying points is worth it?
Divide the cost of the points by the monthly payment savings to find your break-even in months, then compare that with how long you expect to keep the loan. For example, if a point cost 3,000 dollars and hypothetically saved 50 dollars a month, the break-even would be 60 months. If you might sell or refinance sooner, points may not pay off.
How much does one point lower my interest rate?
There is no set amount. The CFPB says the reduction depends on the lender, the kind of loan, and market conditions. The only reliable way to know is to compare the same loan from the same lender with and without points on your Loan Estimate.
Can the seller pay my discount points?
Yes, within your loan program's limits. Fannie Mae caps interested-party contributions at 3, 6, or 9 percent depending on loan-to-value, FHA allows up to 6 percent of the sales price including discount points, and VA does not count normal discount points toward its 4 percent seller concession limit. The IRS treats seller-paid points as paid by the buyer.
Are mortgage points tax deductible?
IRS Publication 936 treats points as prepaid interest. They are generally deducted over the life of the loan, but you can deduct them in full in the year paid if the loan is for buying or building your main home and you meet the other IRS tests. Points on a refinance are generally deducted over the loan term. Check with a tax professional.
Want to Compare Points Side by Side?
I'll price your loan with zero points, with points, and with lender credits, and show you the break-even for each so you can pick the one that fits how long you'll be in the home.
Get Pre-Approved | Book a Free Consultation
Related Guides
- 2-1 Buydown in Texas
- Closing Costs in Texas
- Seller Closing Costs in Texas
- How Much House Can I Afford in Texas?
- Texas Cash-Out Refinance Rules
- Conventional Loans
Sources
- CFPB: How should I use lender credits and points?
- IRS Publication 936, Home Mortgage Interest Deduction (2025)
- Fannie Mae Selling Guide B3-4.1-02, Interested Party Contributions and B2-1.4-04, Temporary Interest Rate Buydowns
- HUD Handbook 4000.1: Interested Party Contributions, Discount Points, and Temporary Interest Rate Buydowns
- VA Pamphlet 26-7, Chapter 8
- Texas Real Estate Commission One to Four Family Residential Contract (Resale) and Texas Constitution Article XVI, Section 50
Taylor Ring, NMLS #2809683 | Fairway Independent Mortgage Corporation, NMLS #2289 | The Wood Group of Fairway, 127 Lake Rd Ste 300, Belton, TX 76513 | Equal Housing Opportunity. This is not a commitment to lend. All loans are subject to credit approval and program guidelines, and approval, rates, and program availability are not guaranteed. No interest rates in this article are offers or current market rates; all payment examples are hypothetical. This article is general information, not legal or tax advice, and is not affiliated with or endorsed by the CFPB, IRS, Fannie Mae, HUD, VA, or any government agency.