What Is a Discount Point?
When a Florida homebuyer applies for a mortgage, the lender offers an interest rate. The borrower can pay a discount point (or multiple points) upfront at closing to "buy down" that rate. Each point costs 1% of the total loan amount.
Example: On a $400,000 mortgage, one discount point costs $4,000. Paying that $4,000 at closing reduces the interest rate from 7.0% to approximately 6.75%. Over the life of a 30-year mortgage, this 0.25% reduction saves the borrower approximately $22,000 in total interest.
The Break-Even Calculation
Paying points is a math problem. The borrower must calculate how long it takes for the monthly savings to exceed the upfront cost:
- Cost of one point: $4,000
- Monthly payment reduction: approximately $67/month
- Break-even period: $4,000 ÷ $67 = approximately 60 months (5 years)
If the borrower plans to keep the mortgage for more than 5 years, buying the point is a good deal. If they plan to sell or refinance within 5 years, they will not recoup the upfront cost.
Tax Deductibility
Discount points paid on a mortgage to purchase a primary residence are generally tax-deductible in the year they are paid (IRS Revenue Procedure 94-27). Points paid on a refinance must be deducted over the life of the loan. This tax benefit further reduces the effective cost of buying points.
Related Terms
- Mortgage — The loan whose rate is reduced by paying points
- Closing Costs — The upfront fees that include discount points
- Debt-to-Income Ratio — A lower rate from points improves the borrower's DTI
Barnes Walker Mortgage Guidance
Barnes Walker's real estate attorneys advise Florida homebuyers on the financial analysis of discount points, helping our clients determine whether paying upfront fees to reduce their mortgage rate makes sense based on their planned ownership timeline and financial goals. Request a legal inquiry for assistance.
Reviewed by the attorneys at Barnes Walker, Goethe, Shea & Robinson, PLLC