Refinance guide mortgage points on a refinance explained

Mortgage Points on a Refinance — Explained

When refinancing a mortgage, you’ll see the option to buy “points.” Points are upfront fees paid to the lender in exchange for a lower interest rate (discount points) or to cover lender charges (origination points). Understanding what points are, when they make sense, and how to calculate whether they pay off is important before you commit cash at closing.

What mortgage points are and when they make sense

There are two common types of points on a refinance:

• Discount points: prepaid interest. Each point typically equals 1% of the loan amount and reduces the interest rate by a certain amount (commonly about 0.125%–0.25% per point, but this varies by lender, loan program, and market conditions).
• Origination points (or fees): charges for processing or originating the loan. These are not rate buy-downs and do not reduce your rate.

Buying discount points makes sense when:

• You plan to keep the loan long enough to recoup the upfront cost through lower monthly payments.
• You have spare cash at closing and prefer a lower monthly payment or reduced lifetime interest costs.
• The rate reduction per point offered by the lender is favorable compared with other uses for the cash.

Benefits and drawbacks

Benefits

• Lower interest rate and monthly payment: reduces total interest paid over the life of the loan.
• Potentially saves thousands over a long-term loan, especially on large loan amounts.
• Can be combined with other refinancing goals (shorter term, switching from adjustable to fixed, consolidating debt).

Drawbacks

• High upfront cost: points are paid at closing and reduce your available cash reserves.
• Longer break-even period: if you sell or refinance again before the break-even, you lose money on the points.
• Points can be financed into the loan, but that reduces or eliminates the financial benefit of buying them.

Costs and fees to expect

Points themselves are priced as a percentage of the loan amount. One discount point = 1% of the loan. On a $300,000 refinance, one point costs $3,000. Other refinance closing costs to consider:

• Appraisal, title search and insurance
• Underwriting, processing, and credit-report fees
• Recording and transfer fees
• Prepaid items (escrow, interest, insurance)

Typical refinance closing costs range from about 2% to 5% of the loan amount (varies by state and lender). Points are in addition to these costs unless you negotiate a lender credit that covers some fees in exchange for a higher rate.

How to evaluate points: break-even and ROI

To decide whether to buy points, calculate the break-even period: how long it takes for your monthly savings to equal the upfront cost of the points.

Break-even (months) = Cost of points / Monthly savings

Example: $200,000 loan, 1 point (1% = $2,000) reduces the monthly payment by about $30 (exact savings depend on term and rates). Break-even = $2,000 / $30 ≈ 67 months (about 5.6 years). If you expect to stay in the home or keep the mortgage longer than 5.6 years, buying the point could be worth it.

Because monthly savings depend on the interest rate reduction and loan term, run the actual payment numbers for accuracy rather than using rough estimates.

Step-by-step process to decide and purchase points

1. Get multiple rate quotes from lenders showing rates with and without points and the associated costs (closing disclosure or Loan Estimate).
2. Calculate the monthly payment and total interest for each option (use a mortgage calculator). Determine monthly savings from buying points.
3. Compute the break-even period (cost of points / monthly savings). Compare to how long you plan to keep the loan or stay in the home.
4. Consider liquidity: will paying points deplete emergency savings? Consider alternatives like a shorter term or a slightly higher rate with credits.
5. Ask lenders whether points are refundable if the loan does not close and whether points can be financed into the loan (usually possible, but it changes the calculation).
6. When satisfied, instruct the lender and verify the points and rate are listed on the Closing Disclosure before closing.

Common pitfalls to avoid

• Not calculating break-even correctly — omitting other closing costs or financed points can mislead you.
• Paying points when you plan to move or refinance again within the break-even period.
• Financing points into the loan: you then pay interest on the points, which can erase the benefit.
• Confusing origination points with discount points — origination points are fees, not rate reductions.
• Failing to compare APRs. APR reflects the cost of the loan including points and fees and helps compare offers.
• Assuming a fixed rate reduction per point — market pricing varies, so confirm the lender’s reduction schedule.

Short FAQ

Are points tax-deductible on a refinance?

Points paid on a refinance are often deductible over the life of the loan (amortized each year) rather than all in the year paid. There are exceptions (for example, if the loan proceeds are used to substantially improve your principal residence the rules can differ). Tax rules change and vary by circumstance, so consult a tax advisor for specifics.

Can I finance points into the refinance loan?

Yes, lenders commonly allow you to roll the cost of points into the loan balance. Financing points reduces your upfront cost but increases the principal balance and interest paid over time, which can negate the savings from the lower rate.

How many points can I buy?

Limits vary by lender and loan program. Commonly borrowers can buy between 0 and 3 discount points, but investor guidelines and product rules set maximums. Ask the lender for their point menu and maximum allowable points.

Can I get a lender credit instead of buying points?

Yes. You can choose a higher interest rate in exchange for a lender credit that reduces your closing costs. This is the opposite of buying discount points and can make sense if you prefer to minimize upfront cash or expect a short loan term.

Buying points on a refinance can be a smart way to lower your monthly payment and long-term interest cost — but only if you do the math and confirm that you’ll keep the loan long enough to recoup the upfront expense. Always compare multiple offers, check the Closing Disclosure carefully, and consider your cash reserves and long-term plans before paying points.

META: topic=mortgage points refinance; words=1065; lastReviewed=2025-11-30