Discount points let you pay more at closing to get a lower interest rate. Lender credits do the opposite: you take a slightly higher rate, and the lender pays part of your closing costs. Which one makes sense comes down to one question: how long will you keep this loan? If you'll keep it past the break-even point, points can pay off. If you might sell or refinance before then, lender credits or a no-points option usually make more sense.
I'm Paul Mattos, a mortgage broker in Fort Mill, SC, licensed in North and South Carolina. This is one of the most common questions I get on a Loan Estimate, so here's how to think it through.
What Are Discount Points?
A discount point is an upfront fee you pay at closing to lower your interest rate. One point generally equals 1% of the loan amount. Points can also come in fractions, like a half point or a quarter point.
How much each point lowers your rate isn't fixed. It depends on the lender, the loan program, your loan details and the market that day. That's why it's worth comparing several pricing options side by side.
Paying points is also called a permanent buydown, because the lower rate lasts for the life of the loan. That's different from a temporary buydown, like a 2-1 buydown, where the rate is lower only for the first year or two.
What Are Lender Credits?
Lender credits work in the other direction. You accept a slightly higher interest rate, and in exchange the lender gives you a credit that covers part of your closing costs.
Lender credits can help if you:
Want to keep more cash for moving, repairs, furniture or reserves
Are stretching to cover the down payment and closing costs
Expect to sell or refinance in the next few years
The tradeoff is a higher rate and payment for as long as you keep the loan.
There's Usually a Middle Option Too
Most lenders can show you a range of choices for the same loan:
A rate with points: a lower rate, more cash due at closing
A "par" rate: no points and no lender credits
A rate with lender credits: a higher rate, less cash due at closing
Seeing all three side by side is the easiest way to understand what you're trading.
How to Find Your Break-Even
The break-even point is how long it takes for the monthly savings from a lower rate to make up for what you paid in points.
Here's the basic math:
Find the cost of the points on your Loan Estimate.
Find how much lower your monthly principal and interest payment would be with the points.
Divide the cost of the points by the monthly savings.
The result is the number of months it takes to break even. If you expect to keep the loan longer than that, paying points may make sense. If you might sell or refinance sooner, you could end up paying for savings you never fully get back.
You can run the same math in reverse for lender credits. Divide the credit you receive by how much higher your monthly payment is. That shows how long it takes before the higher payment costs you more than the credit saved you upfront.
A few things this simple math doesn't capture:
Cash flow. Money you keep at closing could pay down other debt, fund a repair or stay in savings.
Taxes. Points may be tax-deductible in some situations, which can change the math. See the tax section below.
Uncertainty. No one knows for sure how long they'll keep a mortgage.
The Big Question: How Long Will You Keep the Loan?
Paying points is a bet that you'll keep the loan long enough to come out ahead. Here are some things that can cut that time short:
Refinancing. If rates drop later and you refinance, the points you paid on the old loan don't carry over.
Moving. A job change, relocation or growing family can mean selling sooner than you planned.
Moving up. Many buyers in the $300K to $800K range expect to move up within several years.
Points tend to fit buyers who plan to stay put for a long time and don't expect to refinance. Lender credits tend to fit buyers who expect a shorter stay, want to protect their cash or think a refinance is likely.
Points, Credits and Your Cash at Closing
Points add to your cash to close. Lender credits reduce it. Before you choose, look at your whole cash picture:
Your down payment
Closing costs and prepaid taxes and insurance
Points, if you choose them
Moving costs
Money you want left in savings after closing
If paying points would leave you with very little in savings, a par rate or lender credits may be the safer choice.
Can the Seller Pay for Points?
Often, yes. Seller credits can usually be used toward discount points, as well as closing costs and prepaid items, as long as they stay within the loan program's limits on seller contributions. Those limits vary by program and down payment.
If you're negotiating a seller credit, it's worth comparing whether to use it for a permanent buydown with points, a temporary buydown, or your closing costs. Each has a different effect on your payment and your cash.
Are Points Tax-Deductible?
Points may be tax-deductible, but the rules depend on whether it's a purchase or a refinance, whether you itemize and other factors. In general, points on a home purchase may be deductible in the year you pay them if certain conditions are met, while points on a refinance are usually deducted over the life of the loan. The IRS explains the rules in Topic 504, Home Mortgage Points. Ask a tax professional how they apply to you.
Where to Find Points and Credits on Your Loan Estimate
On page 2 of your Loan Estimate:
Points appear in Section A, Origination Charges, as a percentage of the loan amount.
Lender credits appear in Section J, Total Closing Costs.
When you compare offers from different lenders, make sure you're comparing the same thing. A lower rate with points isn't a better deal than a slightly higher rate with no points unless the math works for how long you'll keep the loan. If you have a Loan Estimate from another lender, send it to me for a mortgage offer review.
Points on New Construction and Builder Incentives
Builders often offer incentives that can pay for points or a rate buydown, usually when you use their preferred lender. That can be a real benefit, but compare the full offer:
Is the incentive buying down the rate permanently or only for a year or two?
Would the same incentive be worth more as a closing cost credit?
How long is the rate lock, and what happens if the build is delayed?
My guide to mortgage rate locks covers locking on new construction, and my new construction loans page covers financing for new and custom builds.
Quick Guide: Which Option Fits?
Points may fit if:
You plan to keep the loan for a long time
You don't expect to refinance
You have plenty of cash left after closing
A seller or builder is paying for them
A par rate may fit if:
You're not sure how long you'll keep the loan
You want a balance between rate and cash at closing
Lender credits may fit if:
You expect to sell or refinance within a few years
You want to keep more cash at closing
You're stretching to cover closing costs
Frequently Asked Questions
Is it worth paying points on a mortgage?
It can be, if you keep the loan longer than the break-even point. Divide the cost of the points by the monthly savings to see how many months that takes. If you might sell or refinance sooner, points may not pay off.
How much does one point cost?
One discount point generally equals 1% of the loan amount. How much it lowers your rate varies by lender, loan program and market conditions.
Are lender credits free money?
No. Lender credits come with a higher interest rate, so you pay for them through a higher monthly payment over time. They can still be a good fit if you'll keep the loan for a shorter time or need to protect your cash.
Do I lose my points if I refinance?
The lower rate ends when you refinance, so any savings you hadn't recouped yet are gone. That's why the break-even point matters most if you think a refinance is likely.
Can I use a seller credit to pay for points?
Usually, yes, within the loan program's limits on seller contributions. Compare using the credit for points, a temporary buydown or closing costs before you decide.
Are mortgage points tax-deductible?
They can be in some situations. Purchase points and refinance points are treated differently. See the IRS rules and check with a tax professional.
Let's Compare Your Options
When you're ready, I'll show you a few pricing options for your loan side by side, with points, with no points and with lender credits, along with the break-even for each, so you can choose what fits how long you'll keep the home. Schedule a consultation or start your application. If you're early in the process, start with how to get pre-qualified and pre-approved in Charlotte. If you're weighing whether to move or stay, read Should I sell my house or refinance?
Paul Mattos
Mortgage Broker | Refine Mortgage
Carolina Home Financing
NMLS# 2339069 | Licensed in NC and SC
Call or text: 980-221-4959
Email: paulm@refinemortgage.net
Refine Mortgage Inc. | NMLS# 2417960 | Equal Housing Lender. This article provides general educational information and is not a commitment to lend, a rate quote, or tax or legal advice. Pricing, points, lender credits and seller contribution limits vary by lender, loan program and borrower and can change. Financing is subject to credit, income, assets, appraisal, title and underwriting requirements. Not all applicants will qualify.
