Mortgages guide
Mortgage Points vs. Lender Credits: How to Compare the Tradeoff
Discount points are upfront charges that can lower a mortgage rate; lender credits reduce upfront closing costs in exchange for a higher rate. Neither option is automatically cheaper. Compare written offers for the same loan and estimate how long the monthly savings would take to offset the points you pay.
What one point means
A discount point is generally a charge equal to 1% of the loan amount, though lenders can quote fractional points. One point on a $300,000 loan is $3,000. Points connected to a rate reduction should be shown in the lender’s disclosures. The rate reduction per point is not fixed across lenders or market conditions, so ask for the actual rate and cost on each offer.
How lender credits work
A lender credit reduces some upfront costs. It is commonly associated with a higher interest rate than an otherwise comparable no-credit option. The credit is not free money: compare its effect on payment and total cost over the time you expect to keep the loan. Confirm whether the credit is tied to the rate and which costs it can offset.
Calculate a break-even point
A simple break-even estimate is extra upfront points divided by monthly payment savings. If points cost $3,000 and the lower-rate offer saves a hypothetical $50 per month, the simple break-even time is 60 months. This ignores the changing amortization balance, taxes, refinancing, and the time value of money, so use it as a first comparison rather than a final answer.
Compare the same loan scenario
Ask each lender for offers with the same loan amount, product, term, lock period, and comparable points or credits. Compare rate, APR, monthly principal and interest, lender costs, cash to close, and projected cost over several time horizons. A lower payment can take years to recover a large upfront charge; a credit can help with cash at closing but may cost more if you keep the loan.
Use your expected timeline carefully
If you may move or refinance sooner than the break-even period, paying points may not recover its cost. If you keep the loan longer, the lower payment may eventually outweigh that initial expense, subject to actual terms. Consider cash reserves and other closing needs. A calculator can compare entered payment and fees, but cannot predict refinancing, home sale timing, or future rates.
Include remaining balance and time horizon
Monthly savings alone omit how quickly the two loans amortize and the balance still owed if you sell or refinance. For a short holding period, compare the payments and remaining balances through that date, plus the upfront cost or credit. Ask the lender for side-by-side figures at several time horizons. This makes the tradeoff clearer than multiplying one payment difference by the full 30-year term.
Ask for like-for-like pricing
Request written choices from the same lender for the same loan amount, type, lock period, and closing date, with zero points, points, and any lender credit shown separately. A point may be a discount point or another fee described colloquially as a point; ask what rate reduction it buys and where it appears on the Loan Estimate. CFPB suggests comparing the options over the time you may keep the mortgage.
| Loan amount | Points | Upfront cost |
|---|---|---|
| $300,000 | 1.00% | $3,000 |
| $300,000 | 0.50% | $1,500 |
Frequently asked questions
Is one point always worth a one-percent rate reduction?
No. One point is generally 1% of the loan amount; the rate reduction depends on the lender and offer.
How do I compare points?
Compare actual same-loan offers and estimate the upfront-cost break-even against monthly savings.
Sources and further reading
Try the calculator
Use the Loan Comparison Calculator to explore your own numbers with the assumptions shown in the tool.
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Educational content only; not individualized financial, tax, or legal advice.