Published 2026-05-14
Every Loan Estimate offers a tradeoff buried in section A and section J. You can pay points upfront to get a lower interest rate, or accept a higher rate in exchange for the lender covering some of your closing costs. Most buyers don't understand the choice and accept whatever the loan officer recommends. The right answer depends on three things you can calculate in about 5 minutes: how long you'll keep the loan, your tax situation, and your cash position at closing. This guide walks through the math.
A lender credit is money the lender pays toward your closing costs in exchange for a higher interest rate. The credit appears in section J of your Loan Estimate as a negative number. The higher rate appears in the loan terms section on page 1.
The exchange rate is set by the lender's rate sheet. The typical structure is that every 0.25% increase in your rate gets you a credit equal to about 1% of the loan amount. On a $400,000 loan, taking a rate that's 0.25% higher might earn you a $4,000 lender credit.
Lender credits are not free money. The lender recovers the cost over time through your higher monthly payments. The real question is whether the higher payments cost you more or less than $4,000 over the time you keep the loan.
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Discount points are the reverse of lender credits. You pay the lender money upfront in exchange for a lower interest rate. One point costs 1% of the loan amount and typically reduces your rate by about 0.25%. On a $400,000 loan, paying one discount point costs $4,000 and lowers your rate by roughly a quarter point.
Like lender credits, the exchange rate varies by lender. Some lenders offer a better deal (0.25% rate reduction per 0.75 points). Others offer worse (0.125% per point). Compare on actual Loan Estimates, not on quotes provided over the phone.
Points are tax-deductible in the year you buy a home if you itemize. Lender credits are not deductible. This is one factor in the comparison, but it matters less than it used to since the 2017 tax law roughly doubled the standard deduction.
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The math works the same way for both points and credits. You're comparing an upfront amount to a monthly amount over time.
For discount points: months to break even equals the upfront cost of points divided by the monthly payment savings.
For lender credits: months until the credit is paid back equals the credit amount divided by the extra monthly payment caused by the higher rate.
Worked example with discount points: you're offered a $400,000 loan at 6.75% with no points, or 6.5% if you pay 1 point ($4,000). The lower rate saves about $65 per month. $4,000 divided by $65 equals 62 months. You break even at 5 years and 2 months. If you keep the loan longer, the points were a good deal. If you sell or refinance sooner, the points were a loss.
Worked example with lender credits: same loan at 6.75% with no credit, or 7.0% with a $4,000 credit. The higher rate costs an extra $66 per month. $4,000 divided by $66 equals 60 months. If you keep the loan less than 5 years, the credit was a good deal. If you keep it longer, you would have been better off without it.
The breakeven is roughly the same in both directions because the lender's pricing is symmetric. The decision comes down to how long you'll actually have the loan.
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Take lender credits if any of the following apply.
You expect to refinance within 5 years. If rates drop by more than half a point, you're likely to refinance, and the lender credit already paid off because you got the cash upfront.
You're planning to sell within 5 to 7 years. Same logic. You won't be in the loan long enough for the higher rate to cost more than the credit you received.
You don't have enough cash to cover closing costs comfortably. Lender credits effectively move closing costs into your monthly payment, which is cheaper than dipping into emergency savings or a 401(k).
You don't itemize on your taxes. Points are deductible only if you itemize. Most homeowners take the standard deduction after the 2017 tax law changes, which makes the points tax benefit irrelevant.
You're getting an adjustable-rate mortgage. Your rate is going to change anyway. Locking in a slightly lower starting rate matters less.
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Pay points if any of these apply.
You plan to keep the loan more than 7 to 10 years. Most 30-year mortgages are paid off or refinanced within 7 years, but if you're confident this one will stick, points are profitable.
You have ample cash above your down payment and emergency reserves. Cash earning 4.5% in a high-yield savings account is worth less than the lifetime savings from a lower mortgage rate on a $400K loan.
You itemize on your taxes. Points are deductible, which improves the math by your marginal tax rate. If you're in the 24% bracket, a $4,000 point payment saves you $960 in taxes, effectively making the point cost $3,040.
You're buying a forever home. If you really aren't going to move or refinance, points almost always win.
The rate you're getting is already low (under 5.5%). Buying down a low rate locks in long-term savings that compound over decades.
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Most lenders give you one Loan Estimate based on whatever they assumed you wanted. If that's not what you wanted, ask for alternatives.
Specific request: "Can you send me three Loan Estimates: one with no points and no credits, one with 1 discount point, and one with the maximum lender credit you can offer?" A reputable lender will produce all three within a day. Compare the breakeven for each.
This request also smokes out lenders who are quietly burying discount points in your offer. Some lenders quote a low rate but include 0.5 or 1.0 points to get there. If you asked for "no points" and the comparison Estimate at 0 points has a 0.25% higher rate, you'll see exactly how the lender priced the loan.
If a lender refuses to give you multiple options or says points and credits "aren't available," shop elsewhere. Pricing is supposed to be transparent under TRID rules, and any lender willing to compete will accommodate this request.
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Generally yes if you plan to keep the loan more than 7 years and you itemize on your taxes. The breakeven on a typical 1-point purchase is 5 to 6 years, so anything beyond that is savings. If you're unsure how long you'll keep the loan, lean toward no points or lender credits instead.
On most loans, 5 to 6 years. The exact number depends on your loan amount, the rate reduction per point your lender offers, and your tax bracket if you itemize. The breakeven is shorter on bigger loans because monthly savings are larger relative to the point cost.
No. The lender recovers the credit over time through your higher monthly payments. If you keep the loan long enough, you'll pay back more than the credit was worth. Lender credits beat the alternative when you refinance or sell before the breakeven point, which most borrowers do.
No. You're choosing a position on a rate-vs-cost curve, not a mix of both. You can take a smaller credit or a smaller point amount, but you'd be moving up or down the same curve.
Yes. APR includes the upfront cost of the loan amortized over the loan term. Lender credits reduce your upfront cost, which lowers your APR even though your interest rate is higher. APR is calculated assuming you keep the loan for the full term, which most borrowers don't, so APR alone doesn't tell you whether credits or points are right for you.
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