Prepaid interest with a marketing name. Here is the break-even math and who should actually pay it.
One discount point costs 1% of your loan amount and typically lowers your rate by about 0.25%. On a $400,000 loan, one point costs $4,000 and might move you from 6.5% to 6.25% — dropping the payment from $2,528 to $2,463, a saving of about $65 a month.
Divide the cost by the saving and you get the only number that matters: $4,000 ÷ $65 ≈ 61 months. Keep the loan longer than ~5.1 years and the point pays for itself; sell or refinance sooner and you gave the lender $4,000 for nothing.
Points favor people who are staying put with stable rates: you're confident you'll keep the house and the loan for 7+ years, and you have spare cash after your down payment and emergency fund. They work against you if there's a real chance you'll move, or if rates are likely to fall — because a refinance resets everything, and your prepaid interest evaporates.
Watch for the sales pattern where a "great rate" quietly includes 2–3 points in the fine print. Always compare loans at zero points first, then decide separately whether buying down is worth it. Model both versions in the mortgage calculator, and if you're weighing a refi instead, the break-even calculator does the same math for that decision.
Lenders also offer the reverse: a lender credit — they cover part of your closing costs in exchange for a slightly higher rate. Same math, opposite direction: it wins if you'll move or refinance soon, loses if you stay forever. Short horizon → take credits. Long horizon → consider points. No horizon certainty → take the clean zero-point loan and keep your cash.
Are discount points tax-deductible?
Often, yes — on a purchase of your primary home they're generally deductible in the year paid if you itemize, while points on a refinance are typically spread over the life of the loan. Rules have conditions, so it's worth one question to your tax preparer.
Is buying two or three points twice as good?
Usually not. The rate cut per point tends to shrink as you stack them, and the break-even stretches further out. Ask your lender for a quote grid — the same loan at zero, one, and two points — and run the arithmetic on each line separately.
Points or a bigger down payment?
If PMI is in play, extra down payment usually wins: it shrinks the balance and gets PMI cancelled sooner. Once you're past 20% down, it's a genuine trade — a point lowers the rate on the whole loan, more down shrinks the loan at the same rate. Model both in the mortgage calculator.
Should I buy points if I might refinance when rates fall?
No. A refinance replaces the loan, and prepaid interest on the old loan is simply gone. Points are a bet that you'll keep this exact loan past the break-even month — if that's not a confident bet, keep the cash.
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