Did You Pay Points When You Took Out the Loan? Here’s What to Know

When taking out a mortgage, borrowers may have the option to pay points upfront in exchange for a lower interest rate. These points, also known as discount points, reduce long-term costs but require an initial payment at closing. Understanding how they impact your loan helps in making informed financial decisions.

Identifying Points on Loan Documents

Loan documents contain numerous financial details, and identifying points requires careful review. The Loan Estimate, provided within three business days of applying for a mortgage, is the first place to check. On page two, under “Loan Costs,” discount points appear as a percentage of the loan amount and their corresponding dollar amount.

The Closing Disclosure, provided at least three business days before finalizing the loan, also lists points under “Origination Charges” on page two. Borrowers should verify this amount matches what was initially disclosed, addressing any discrepancies with the lender before closing.

Additionally, the promissory note reflects the final interest rate, which incorporates any points paid. Comparing the agreed-upon rate with market rates at closing can help determine if points were applied. The ALTA Settlement Statement further confirms the total amount paid at closing, including points.

Effects on Monthly Payments

Paying points upfront lowers the interest rate, reducing monthly payments. A lower rate means less interest accrues over time, leading to long-term savings.

For example, if a borrower takes out a $300,000 mortgage at 7% interest and pays one point (1% of the loan amount, or $3,000), the lender may lower the rate to 6.75%. This seemingly small reduction can save hundreds of dollars annually.

The impact depends on loan size, term length, and how much the rate decreases per point paid. Typically, each point lowers the rate by about 0.25%, though this varies. A borrower with a 30-year fixed mortgage of $400,000 at 6.5% would pay around $2,528 per month in principal and interest. If they paid two points to reduce the rate to 6%, their monthly payment would drop to approximately $2,398, saving $130 per month. Over the life of the loan, this amounts to nearly $47,000 in interest savings.

A break-even analysis helps determine if paying points is worthwhile. This calculation divides the upfront cost by the monthly savings to find how long it takes to recover the expense. If a borrower pays $5,000 in points and saves $100 per month, the break-even period is 50 months, or just over four years. If they plan to sell or refinance before then, the savings may not justify the cost.

Loan type also plays a role. Adjustable-rate mortgages (ARMs) may offer lower initial rates, but if the fixed period is short, paying points might have limited benefits. On a 5/1 ARM, where the rate adjusts after five years, the borrower may not recoup their investment before the rate changes. Fixed-rate loans, however, lock in the reduced rate for the entire term, making savings more predictable.

Potential Tax Deductions

Points paid on a mortgage may be tax-deductible, but eligibility depends on IRS rules. The deduction generally applies to points on a primary residence if specific criteria are met. The payment must be customary in the area, paid directly from the borrower’s funds, and calculated as a percentage of the loan amount. If these conditions are satisfied, the full amount may be deducted in the year paid.

For refinancing, the deduction works differently. Instead of an immediate write-off, points must be spread out over the loan’s life. If a borrower refinances a 30-year mortgage and pays $4,500 in points, they can deduct $150 per year ($4,500 ÷ 30). However, if the loan is paid off early due to selling the home or refinancing again, any remaining undeducted points can typically be claimed that year.

The deduction is only available to taxpayers who itemize rather than taking the standard deduction. With the higher standard deduction amounts introduced by the Tax Cuts and Jobs Act, fewer homeowners benefit from itemizing. In 2024, the standard deduction is $14,600 for single filers and $29,200 for married couples filing jointly, meaning total deductions—including mortgage interest, property taxes, and points—must exceed these amounts to be worthwhile.

Recordkeeping for Points

Maintaining thorough documentation of points paid is necessary for financial planning and potential tax benefits. The IRS requires clear records when claiming deductions, and lenders do not always issue separate tax forms detailing points. Instead, borrowers typically rely on Form 1098, which reports mortgage interest and may include points paid. However, not all lenders itemize points separately, making it necessary to retain original loan documents, closing disclosures, and settlement statements as supporting evidence.

Accurate records help track overall loan costs and compare financing terms in case of future refinancing. If a borrower refinances multiple times, distinguishing between original and refinanced loan points prevents miscalculations when amortizing deductions. Keeping detailed financial records also allows homeowners to verify lender calculations and dispute errors, which can arise due to misclassification of fees or misreported payments.