Mortgage Discount Points and Lender Credits Explained

The basic trade

The CFPB describes points and lender credits as two sides of the same trade-off between what you pay at closing and what you pay every month.

• Points (also called discount points): you pay more at closing and get a lower interest rate.
• Lender credits: the lender pays some of your closing costs and you get a higher interest rate.

One point equals 1% of the loan amount. On a $300,000 loan, one point is $3,000. Points do not have to be whole numbers: the CFPB gives examples of 1.375 points, 0.5 points and 0.125 points. They are paid at closing and added to your closing costs.

Watch the wording. The CFPB notes that some lenders use "points" for any upfront fee calculated as a percentage of the loan, whether or not it lowers your rate. Ask what each charge buys.

Finding the break-even

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

These rates are made up for the example. Real pricing differs by lender and changes daily, so run the numbers on actual quotes. Our refinance break-even calculator does the same math for any two rates and costs.

Lender credits

Lender credits work in reverse. In the same illustrative pricing, a lender might offer 7.0% with a $3,000 credit toward closing costs. That raises the payment by about $50 a month, so after about five years you have paid back the credit in higher payments, and after that the credit costs you money.

Credits can make sense when cash is tight at closing, or when you expect to sell or refinance within a few years. The CFPB adds a caution: if you don't know how long you will keep the loan, and you have enough cash for closing and savings, you might choose neither points nor credits.

How to compare offers

The CFPB recommends asking a loan officer for two options, with and without points or credits, and having them total the costs over three timeframes: the shortest, the longest and the most likely time you expect to keep the loan. Some questions to ask:

• What rate do I get with zero points? With one point? With a credit?
• Are these discount points that lower my rate, or origination fees?
• Is the quote locked, and for how long?

Every lender must use the same Loan Estimate form, which makes side-by-side comparison easier. Points appear in section A, Origination Charges.

Points and taxes

The IRS treats points as prepaid interest. Points on a loan to buy or build your main home may be deductible in the year you pay them if a list of conditions is met, such as the points being computed as a percentage of the loan and clearly shown on the settlement statement. Points on a refinance are generally deducted over the life of the loan. Whether any of this helps depends on whether you itemize; ask a tax professional about your situation.

The short version

Points are a bet that you will keep the loan past the break-even. Credits are a bet that you won't. Average rates from Freddie Mac's weekly survey, which we show with its date on our calculators, no longer include average points: Freddie Mac stopped publishing fees and points in November 2022. So only your own quotes can tell you what a point buys.

This guide is educational and not financial or tax advice.

Common questions

How much does one point lower the rate?

It varies by lender, loan and day. The CFPB advises asking lenders to show the exact effect on your rate. Don't assume a fixed amount.

Are points tax deductible?

Sometimes. The IRS says points on a loan to buy or build your main home can often be deducted in the year paid if several tests are met; points on a refinance are generally deducted over the life of the loan. See IRS Topic 504.

Where do points appear on my Loan Estimate?

In section A, Origination Charges, as a percentage of the loan amount and in dollars.