A discount mortgage rate is a lower interest rate you get by paying extra money up front to the lender. This extra money is called “discount points” or just “points.” Each point costs 1% of your loan amount. In 2026, buying discount points is one of the few ways to reduce your mortgage rate before it locks in.
Written by: John Tappan, NMLS #394171 | Fact-Checked ✓
How Discount Points Work
Each discount point costs 1% of the loan amount you borrow. On a $400,000 mortgage, one point costs $4,000. Each point typically reduces your interest rate by 0.25%, though the exact reduction varies by lender and market conditions. Some lenders offer smaller reductions (0.125% per point) and others larger (up to 0.375%).
If you buy 2 points on a $400,000 loan, you pay $8,000 at closing. Your interest rate drops by about 0.50%. This lower rate saves you money every month for the life of the loan.
The Cost You Pay Now vs the Savings Later
The Federal Reserve raised its target rate on September 16, 2026 for the first time since 2023. This pushed mortgage rates higher. Some borrowers are considering discount points to bring rates back down.
Here is the trade-off:
- Now: You pay extra cash at closing (1% of loan per point)
- Later: You save money each month through lower interest
Whether points make sense depends on how long you plan to keep the loan. This is called the “break-even period.” Divide the cost of the points by the monthly savings to find your break-even month. If you plan to keep the loan longer than that break-even, points save money. If you sell or refinance sooner, points cost more than they save.
Break-Even Example
Say you buy 1 point for $4,000 to save $60 per month on your mortgage payment. Your break-even is $4,000 divided by $60, which equals 67 months (about 5.5 years). If you keep the loan longer than 5.5 years, you save money. If you sell in 4 years, you lost money on the points.
Most homeowners in 2026 are locked into their current mortgage due to low rates from 2020-2022 (about 82.8% of homeowners have sub-6% mortgages per Redfin data). This makes long-term hold periods more likely, which improves the math on discount points for new purchases.
When Discount Points Make Sense
Discount points work best when:
- You plan to keep the loan 7+ years
- You have extra cash beyond your down payment and reserves
- You are in your “forever home”
- Interest rates are unlikely to drop soon (allowing refinance)
Discount points work poorly when:
- You plan to move or refinance within 3-5 years
- You need every dollar for the down payment
- Rates may drop soon
- You could invest the money for higher returns elsewhere
Are Discount Points Worth It in 2026?
The answer depends on your specific situation. After the September 16, 2026 Fed hike, many borrowers face higher rates than they hoped for. Discount points can bring the rate down but require extra cash. Compare the cost of points against the rate-and-term refinance math framework which uses similar break-even principles.
For borrowers wondering about the broader loan qualification landscape, review mortgage qualification requirements to understand your options.
Frequently Asked Questions
Are mortgage discount points tax deductible?
Yes, in many cases. Discount points paid on a mortgage for your primary residence are generally deductible as home mortgage interest under IRS Publication 936. Points paid on a refinance must typically be deducted over the life of the loan, not all in one year. Points paid on a purchase can often be deducted in the year paid. The rules are complex and depend on your specific tax situation. Consult a qualified tax professional to understand what applies to your situation.
How much does one mortgage point cost in 2026?
One mortgage discount point costs 1% of the total loan amount. On a $300,000 loan, one point costs $3,000. On a $500,000 loan, one point costs $5,000. Each point typically reduces your interest rate by 0.25%, though the exact reduction varies by lender and current market conditions. Some lenders offer smaller reductions (0.125% per point) and others larger (up to 0.375%). Following the September 2026 Fed hike, point pricing has adjusted upward at some lenders.
Should I buy discount points on my mortgage?
The answer depends on how long you plan to keep the loan. Calculate your break-even by dividing the total point cost by the monthly savings. If you plan to keep the loan longer than the break-even period, points save you money. If you plan to sell or refinance sooner, points cost more than they save. Most financial advisors suggest points make sense when you plan to keep the loan 7+ years. Homeowners planning to move in 3-5 years usually skip points.
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