Mortgage Points Explained: Discount Points vs. Origination Points
Understand what points mean on a loan estimate, how they affect your rate and closing costs, and when paying points can save money over time.
Mortgage points are one of the easiest places for loan offers to look “similar” while costing very different amounts at closing. This guide breaks down the two main types of points, discount points and origination points, and shows how to estimate whether paying for a lower rate is actually worth it.
- • What points are and how lenders price them
- • Discount points vs origination points (clear difference)
- • Break-even math (when points pay off)
- • APR vs rate and why it can be confusing
What are mortgage points?
A mortgage point is a fee paid at closing. In many cases, one point equals 1% of the loan amount, and lenders may offer pricing in fractions of a point (for example, 0.375 points).
The key is that “points” can mean two different things. Some points are used to lower the interest rate, while others are lender fees that don’t reduce the rate.
Optional prepaid interest you pay to lower your interest rate and reduce your monthly principal-and-interest payment.
Lender compensation and processing costs. Origination points usually do not lower your rate, but they raise your closing costs.
When comparing loan offers, hold the inputs constant (loan amount, term, and rate type). Then compare points/fees and the resulting monthly payment and cash-to-close.
Discount points (rate buy-down) explained
Discount points are optional prepaid interest. You pay more upfront at closing, and in return the lender gives you a lower interest rate. That lower rate typically reduces your monthly principal-and-interest payment and lowers total interest paid over time, assuming you keep the loan long enough.
How much does a point lower the rate?
The rate reduction varies by market conditions and lender pricing. It’s common to see roughly 0.125% to 0.25% per point, but the exact tradeoff can be larger or smaller depending on the day and the program.
Example: what buying down the rate looks like
- Loan amount: $400,000
- Cost of 1 point (1%): $4,000
- Rate without points: 6.75%
- Rate with points: 6.50% (example)
In this scenario, you pay $4,000 upfront to get a lower rate. The value of that choice depends on your monthly savings and how long you keep the mortgage.
Origination points explained
Origination points are lender fees charged for making the loan, underwriting, processing, and funding. Origination points typically do not reduce your interest rate. They increase your cash-to-close without the long-term savings that a lower rate provides.
How to spot origination points
- They appear as “origination charge,” “lender fee,” or “points” not tied to a rate reduction.
- They may be bundled with underwriting/admin fees or shown as a percentage.
- Two lenders can show the same rate, but one may have higher origination costs.
Some lenders reduce upfront fees but offer a slightly higher rate. The “best” deal depends on your timeline and whether you value lower cash-to-close or a lower monthly payment.
Discount points vs. origination points (quick comparison)
| Feature | Discount points | Origination points |
|---|---|---|
| Primary purpose | Lower your interest rate | Lender compensation/fees |
| Optional? | Often yes | Sometimes, depends on lender |
| Reduces monthly payment? | Yes (usually) | No |
| Creates long-term savings? | Yes, if kept past break-even | No, only increases upfront cost |
| Best used when | You expect to keep the loan longer | You understand the fee and compare offers |
How to tell if discount points are worth it (break-even)
The simplest decision tool is a break-even estimate. The idea is to compare the upfront cost of points to the monthly savings from the lower rate.
Upfront cost of points ÷ Monthly savings = Months to break even
Example break-even calculation
- Upfront cost: $4,000
- Monthly savings: $100
- Break-even: 40 months (3 years, 4 months)
If you’re likely to refinance or sell before that point, paying points may not pay off. If you expect to keep the loan longer, the lower rate is more likely to win.
If you’re unsure about your timeline, run two scenarios: (1) no points and (2) points. Compare the monthly payment and total interest, then sanity-check the break-even against how long you realistically keep the mortgage.
When paying discount points can make sense
Discount points tend to make the most sense when you value a lower payment and expect to keep the loan well beyond the break-even point.
- You plan to stay in the home long-term
- You expect to keep the loan for many years
- You have extra cash available at closing
- Reducing the payment improves comfort or approval odds
- You may refinance soon
- You might move within a few years
- Cash-to-close is already tight
- The rate reduction is small compared to the cost
Points, APR, and taxes (what to know)
APR can be helpful because it attempts to reflect the cost of certain fees and points. However, APR assumes you keep the loan for the full term, which may not reflect your real timeline if you refinance or sell.
Why APR can be confusing
- APR can look worse on a low-rate loan with points, even if it’s a good long-term fit.
- APR can look better on a higher-rate loan with fewer fees, even if it costs more over time.
- Your actual “best” deal depends on how long you keep the loan.
Are points tax deductible?
Discount points may be tax-deductible in some situations, but rules vary and often depend on whether the loan is a purchase or refinance and how proceeds are used. Because this is very situation-specific, it’s smart to confirm with a qualified tax professional.
How to compare offers when points are involved
Points matter most when you compare loan offers that look similar on the surface. A simple comparison process can prevent you from overpaying.
- Confirm the point type. Are the points buying down the rate or are they lender fees?
- Compare apples-to-apples. Use the same loan amount, term, and assumptions.
- Check monthly payment and cash-to-close. The best deal depends on your budget and timeline.
- Run a break-even estimate. If you might refinance or move before break-even, points may not pay off.
- Watch for “fees moved around.” Lenders can shift costs between points and other line items.
“Is this rate quote assuming points?” If yes, ask for the same quote with zero points so you can see the tradeoff clearly.
Mortgage points FAQs
Can I negotiate mortgage points?
Sometimes. Lenders may adjust pricing, especially when you’re comparing offers. Ask for a “no points” version and a “points” version of the same quote to see the tradeoff.
Can points change after I lock my rate?
They can if the lock expires, if the loan terms change, or if the lender’s pricing changes and you re-lock. Always confirm what’s included in the locked quote.
Are points refundable if I refinance?
No. Points are paid at closing. If you refinance or sell before break-even, you may not recover the upfront cost through monthly savings.
Why do two lenders show the same rate but different closing costs?
Differences often come from points and lender fees. One lender may include discount points to reach the same rate, or may charge higher origination costs.
Should I compare APR or the interest rate?
Compare both, but also compare the monthly payment and cash-to-close. APR can help capture certain fees, but your best choice still depends on how long you keep the loan.
For a clearer foundation on loan terms you’ll see in quotes and loan estimates, read The Ultimate Guide to Mortgage Basics.