Housing & property
Mortgage points: Definition, Formula and Example
Discount points are upfront mortgage charges connected to a lower interest rate; one point equals 1% of the loan amount.
Scope: General financial concept; examples are hypothetical.
Other names and related labels: Discount points; Rate buydown points.
How it works
Paying points exchanges more cash at closing for a different rate and later payment stream. The rate reduction per point is not fixed across lenders or loans. Lender credits can make the opposite tradeoff, reducing upfront cost in exchange for a higher rate.
Points cost = loan amount × points / 100; simple recovery months = upfront incremental cost / monthly payment saving
The recovery formula ignores timing value, tax, financed costs and remaining principal. Use comparable offers and separate other closing costs.
1.25 points on a $240,000 mortgage
Assume the lower-rate offer saves $60 per month and all else is comparable.
- Points cost: $240,000 × 1.25/100 = $3,000.
- Simple payment recovery: $3,000/$60 = 50 months.
The points cost $3,000, with a simple payment-based recovery of 50 months.
Points paid upfront; constant $60 saving; no other offer differences, tax effects or discounting.
The worked example uses the assumptions above. Related tools may model a different scope; check their descriptions before comparing results.
One point is not a one-percentage-point rate cut
The rate reduction is lender-specific. Selling, refinancing or paying off early can shorten the time available to recover the charge. A complete comparison also considers the outstanding balance at that date.
Explore with a calculator
- Mortgage Calculator
Inspect mortgage payment and entered financing-cost assumptions.
- Refinance Calculator
Compare fees, points and a simple closing-cost recovery measure.
Sources and checks
Definition and example arithmetic checked . Sources explain the concepts; numerical examples use the assumptions stated above.
Calculation methodology and review status · All glossary terms