Points and lender credits: paying now or paying later

Points: more now, less later

According to the CFPB, points (also called discount points) lower your interest rate in exchange for paying more at closing. You pay more upfront, receive a lower rate, and therefore pay less over time. The CFPB says points can be a good choice if you plan to keep the loan for a long time.

The CFPB explains the arithmetic: one point equals one percent of the loan amount. Its own example is that one point on a $100,000 loan equals $1,000. Points do not have to be round numbers; the CFPB mentions examples like 1.375 or 0.5 points.

How much the rate drops per point depends on the lender, the loan type and the market. Sometimes the reduction is relatively large; sometimes it is smaller.

Lender credits: less now, more later

Lender credits work the same way in reverse, the CFPB explains. You accept a higher interest rate, and the lender gives you money to offset closing costs. You pay less upfront and more over time. Credits are sometimes called "negative points" on a lender's worksheet.

Credits appear as a negative number in the Lender Credits line on page 2 of the Loan Estimate.

Watch the words

The CFPB notes that some lenders use "points" for any upfront fee calculated as a percentage of the loan, whether or not you get a lower rate, and that some lender credits are unrelated to the rate, for example temporary offers. It adds that, by law, points listed on the Loan Estimate and Closing Disclosure must be connected to a discounted interest rate, and they appear on page 2, Section A.

If you are considering points or credits, the CFPB says to always ask lenders to clarify the effect on your interest rate.

How to decide

The CFPB frames the choice around time and cash:

• If you plan to keep the mortgage a long time and can afford more cash at closing, points may save money.
• If you have limited cash for closing, credits may help, at the cost of a higher rate.
• If you do not know how long you will keep the loan, and you have enough cash for closing and savings, you might choose neither.

The CFPB suggests asking a loan officer to show two options, with and without points or credits, and to calculate total costs over a few possible time frames, then choosing the shortest time frame you realistically expect to keep the loan.

A break-even sketch you can do yourself

For any two options from the same lender:

1. Write the extra cash at closing for the points option.
2. Write the monthly saving in principal and interest compared with zero points.
3. Divide the extra cash by the monthly saving. That gives an approximate number of months to recover the upfront cost.

If you might sell or refinance before then, the points may not pay off. This sketch ignores the value of keeping cash in savings and any tax effect, so treat it as a starting point. The payment worksheet can show the monthly principal and interest for each rate.

Comparing across lenders

The CFPB warns that lenders can have different pricing structures, and some may be more or less expensive overall regardless of points or credits. That is why it recommends shopping around and asking each lender for the same amount of points or credits. Otherwise a lower rate at one lender might simply reflect more points. See compare Loan Estimates side by side.

Cash after closing matters

Points use cash that could otherwise stay in your emergency fund. The down payment chapter explains why keeping savings after closing matters for a first home, when repairs and moving costs are common. A lower rate is not worth leaving yourself without a cushion.

Points and taxes

Points can have tax consequences. For the 2025 tax year, IRS Publication 936 (2025) explains that "points" can include loan origination fees, maximum loan charges, loan discount or discount points, and includes a flowchart for whether points are fully deductible in the year paid, with conditions such as the loan being secured by your main home and points being an established practice in your area. Deductions for home mortgage interest and points are claimed only if you itemize on Schedule A (Form 1040) (2025 tax year). Rules change; check the publication for the year you file and consider a tax professional. See mortgage interest and taxes.

Before you sign

On the Closing Disclosure, check that points or credits match what you chose. If the amount has changed, ask why before closing. Credits and points connected to your rate should move together with any change in rate.

Lender pricing and tax rules change. Confirm figures with your lender and check current IRS guidance.