Mortgage Points on Your Closing Disclosure: Buy Down Your Rate

Mortgage discount points are optional fees you pay at closing to permanently reduce your interest rate. One point costs 1% of your loan amount and typically reduces your rate by 0.25%. On a $350,000 mortgage, buying one point costs $3,500 upfront and saves you approximately $52 per month. But whether points are a good deal depends entirely on how long you plan to keep the loan. Here's how points appear on your Closing Disclosure, how to calculate the breakeven, and how they affect your taxes.

Where Points Appear on the CD

Points appear in Section A of Page 2 on your Closing Disclosure, alongside your other origination charges. They will be clearly labeled as "Discount Points," "Loan Discount," or "Mortgage Points." The percentage of the loan amount and the dollar amount must both be disclosed. For example: "0.500% of Loan Amount (Points) — $1,750." If a fee in Section A is labeled as a point and you did not agree to pay points, question it immediately. This is a material loan term that should have been discussed during your application and disclosed on every Loan Estimate. Points increase your total closing costs, and they are subject to zero tolerance under TRID — the amount cannot change from the Loan Estimate.

Calculating the Breakeven: When Points Make Sense

The breakeven calculation is straightforward: divide the cost of the points by the monthly savings. If one point costs $3,500 and saves $52 per month, the breakeven is $3,500 / $52 = 67 months (about 5.6 years). If you plan to keep the loan longer than 5.6 years, buying points saves you money. If you sell or refinance before the breakeven point, you lose money on the transaction.

The average American stays in a home for approximately 13 years but refinances or sells their mortgage roughly every 5-7 years. This means the typical borrower is right around the breakeven point for a one-point purchase. If you expect rates to fall within the next 3-4 years and plan to refinance, buying points is almost certainly a losing proposition — you will not recoup the cost before you refinance into a lower rate. If you expect rates to stay flat or rise and plan to keep the loan for 7+ years, points become mathematically favorable. Use our amortization calculator to model the total interest savings with and without points over your expected holding period.

Points vs. Lender Credits: The Inverse Relationship

Points and lender credits are opposites. Points increase your closing costs but reduce your rate. Lender credits reduce your closing costs but increase your rate. The choice depends on your cash position and how long you expect to keep the loan. If you are cash-constrained and need to minimize upfront costs, accepting a slightly higher rate in exchange for a lender credit that covers some or all of your closing costs can make sense — even though you pay more over the long term. If you have cash available and plan to hold the loan long-term, buying points to reduce the rate maximizes your total savings.

Tax Treatment of Points

Points are prepaid interest, and like all mortgage interest, they are generally deductible. However, the timing of the deduction depends on the type of loan and how the points were paid. For a primary residence purchase loan, points paid from your own funds at closing and clearly identified as points on the CD may be fully deductible in the year paid, provided the points are a standard practice in your area and the amount is reasonable. For a refinance, points must be amortized over the life of the loan — you cannot deduct them all in the year of refinancing. For investment properties, points are always amortized over the loan term, not deducted in the year paid.