2026-10-30 · 4 min read · Orange County
What Are Discount Points and Should I Buy Them on My First Mortgage?
The short answer
Discount points are money you pay your lender at closing to get a lower interest rate. One point costs 1% of your loan amount. Points can save money if you keep the loan long enough to pass your break-even point, and they cost you money if you sell or refinance before then. Compare quotes with points, without points and with lender credits before you decide.
What Exactly Is a Discount Point?
What are discount points, and should you buy them on your first mortgage in Orange County? A point is prepaid interest that buys a lower rate, and whether it makes sense depends mostly on how long you expect to keep the loan.
I'm Jeanette Nelson, a REALTOR® with Jeanette Nelson Real Estate, Keller Williams Realty, serving Orange County, Huntington Beach, Costa Mesa, Fountain Valley, and surrounding areas. I want you to understand points before you sit down with a lender.
The Consumer Financial Protection Bureau (CFPB) explains it simply. One point equals 1% of the loan amount. On a $100,000 loan, one point costs $1,000. You pay points at closing, and they add to your closing costs.
This article is general information, not lending or tax advice. Your lender and your CPA can apply it to your situation.
How Do Points Lower My Payment?
When you pay points, the lender lowers your interest rate. A lower rate means a lower monthly payment for the life of the loan.
The CFPB gives an example on a $180,000, 30-year fixed loan with a 5.0% rate at zero points. Paying 0.375 points, or $675, lowered the rate to 4.875% and saved about $14 a month. Your own quote will use today's rates and your loan amount.
How Do I Figure Out My Break-Even Point?
The break-even point is how long it takes for your monthly savings to add up to what you paid for the points.
- Find the cost. Look at the dollar amount of the points on your Loan Estimate.
- Find the savings. Compare the monthly payment with points to the payment without them.
- Divide. Cost divided by monthly savings equals the number of months to break even.
Using the CFPB example, $675 divided by about $14 a month is roughly 48 months, or about four years. If you sold the home or refinanced before then, you'd have paid more than you saved.
The CFPB suggests asking for quotes with points, with lender credits and with neither, then comparing the total cost over your shortest, longest and most likely time in the loan.
What Are Lender Credits, and How Are They Different?
Lender credits work in reverse. The lender gives you money toward your closing costs, and in exchange your rate is higher. The CFPB calls credits "negative points."
In the same CFPB example, taking a credit of 0.375 points gave the borrower $675 toward closing costs, and the payment went up by about $14 a month.
A credit lowers the cash you need on closing day, while points do the opposite. If you're saving every dollar for your down payment, my article on how much to save for your first home can help you plan.
When Might Points Make Sense, and When Might They Not?
Points may be worth a look when:
- You expect to stay in the home and keep the loan for many years.
- You have cash left after your down payment, closing costs and a cushion for repairs.
- The rate drop is large enough that your break-even point comes fairly soon.
Points may not fit when:
- You think you might move or refinance within a few years.
- Paying them would drain the savings you need after you move in.
There's also a tax angle. IRS Topic 504 says points on a loan to buy your main home may be deductible if certain tests are met, including that you itemize. Ask your CPA whether that applies to you.
How Do I Compare Points Between Lenders?
Your Loan Estimate shows points on page 2, in the loan costs section. The CFPB says lenders must give you a Loan Estimate within three business days of your application, which makes it easier to compare offers.
When you compare, ask each lender for the same number of points or credits. Otherwise you're comparing different deals. My articles on questions to ask a lender and locking your rate walk through the rest of the conversation.
Let's Start With a Conversation
If you'd like help reading your quotes before you choose a lender, I'd be glad to sit down with you and go through the numbers together. Call or text me at 714.366.8575 | DRE: 01397168, or contact me. Jeanette Nelson is a REALTOR® with Jeanette Nelson Real Estate, Keller Williams Realty, serving Orange County, Huntington Beach, Costa Mesa, Fountain Valley, and surrounding areas.
Frequently asked questions
How much does one discount point cost?
One point costs 1% of your loan amount. On a $500,000 loan, one point is $5,000. Lenders also quote fractions of a point.
Do I have to buy points?
No. Points are optional. You can take the rate offered with zero points, pay points for a lower rate, or take a lender credit with a higher rate.
Are points the same as closing costs?
Points are one part of your closing costs. They appear in the loan costs section of your Loan Estimate and Closing Disclosure.
Are discount points tax deductible?
They may be. IRS Topic 504 lists the conditions for deducting points on a loan for your main home. Talk with your CPA about your own return.