Discount points and lender credits
Paying points lowers your interest rate; taking a lender credit lowers your upfront costs but raises the rate. Whether it pays off depends on how long you keep the loan.
Sourced from official pages · Updated September 30, 2026💡 Key takeaways
- One discount point generally costs 1% of the loan amount and lowers the rate by an amount the lender quotes.
- A lender credit lowers your closing costs in exchange for a higher rate.
- Use the break-even months to decide: cost ÷ monthly savings.
- Compare offers with the same number of points, or compare APR and total costs.
How points work
One discount point generally costs 1% of the loan amount and lowers the interest rate by an amount the lender quotes. A lender credit does the opposite: the lender pays part of your closing costs in exchange for a higher rate.
The break-even question
Divide the up-front cost of the points by the monthly savings to find how many months it takes to recover the cost. If you expect to keep the loan longer than that, points can save money; if you may sell or refinance sooner, they may not. Use the points break-even calculator.
Compare on the Loan Estimate
Compare offers with the same number of points, or compare the APR and total costs. Ask lenders for quotes with and without points.
Points vs credits at a glance
| Option | Upfront cost | Rate | Best if… |
|---|---|---|---|
| Pay points | Higher | Lower | You will keep the loan for a long time |
| Take lender credits | Lower | Higher | You may sell or refinance soon or need cash now |
| Neither | Middle | Middle | You want simplicity |
Tax and other considerations
Whether points are deductible can depend on the loan and your situation; ask a tax professional and see IRS guidance. Points paid on a purchase are generally different from points paid on a refinance.
🔤 Key terms
| Term | Meaning |
|---|---|
| Discount points | Fee paid at closing to reduce the interest rate |
| Lender credit | Money from the lender that reduces closing costs in exchange for a higher rate |
| Break-even | Months for savings from a lower payment to equal the upfront cost |
| Par rate | A rate with no points or credits |
Step by step
- Ask each lender for quotes at the par rate, with points and with credits.
- Compute the break-even for each option.
- Decide how long you expect to keep the loan.
- Choose the option that fits your time horizon and cash on hand.
🧮 Example: is one point worth it? (hypothetical)
On a $300,000 loan, one point costs $3,000. Suppose it lowers your payment by $50 a month. Break-even = $3,000 ÷ $50 = 60 months (5 years). If you expect to keep the loan longer than five years, the point may pay off; if not, it may not. Use the points break-even calculator with your own Loan Estimate numbers.
⚠️ Common mistakes to avoid
- Paying points without computing the break-even.
- Comparing loans with different numbers of points.
- Ignoring that a refinance or sale resets the payoff clock.
- Forgetting that lender credits raise your rate for the whole loan.
🛠️ Try it yourself
❓ Frequently asked questions
What is a discount point?
A fee equal to 1% of the loan amount paid to reduce the interest rate.
Are lender credits free money?
No. They come with a higher interest rate.
How do I compare offers with points?
Use the APR and the total cost over the time you expect to keep the loan.
Can the seller pay for my points?
Depending on the contract and loan rules, sellers may contribute toward costs; ask your lender.
📚 Sources
This guide is general information, not financial, tax or legal advice. Rules and limits change; confirm with the sources above or a licensed professional.