Discount points or lender credits: price the tradeoff
Compare mortgage points and lender credits using identical loan terms, holding periods and cash-to-close assumptions.
What matters before you decide
Points generally exchange more upfront cost for a lower rate; lender credits generally exchange a higher rate for help with closing costs. One point is one percent of the loan amount, but it does not purchase a standard rate reduction. Request competing options for the same loan and rate-lock period.
- Request comparable zero-point and credit options.
- Separate points from other fees.
- Compare debt and cash paid at the same horizon.
- Retain a post-closing reserve.
Normalize the quotes first
Compare the same principal, loan type, term, down payment, lock duration and quote date. Separate discount points from other origination charges and distinguish lender credits from seller credits. Ask for a no-point option and alternatives with different points or credits. A rate advertised without its associated upfront cost is incomplete. Reconcile each option to its Loan Estimate rather than combining figures from different quote dates.
Calculate a useful, limited break-even
For otherwise identical fixed-rate loans, divide the extra upfront cost by the monthly principal-and-interest saving for a simple payback estimate. Then compare cumulative payments and remaining principal at your expected sale or refinance date. The simple calculation ignores the value of cash, taxes and differences in debt balances. A lower payment alone cannot establish that the more expensive option is cheaper over your holding period.
Protect the reserve after closing
Use conservative holding periods and include a scenario in which you move earlier than planned. Money used for points cannot also fund repairs or an emergency reserve. A lender credit can preserve liquidity but may cost more if the higher-rate loan remains outstanding for years. Obtain the final rate, points and credits in writing and confirm whether changed timing or loan terms require a new quote.
Decision checklist
- Request comparable zero-point and credit options.
- Separate points from other fees.
- Compare debt and cash paid at the same horizon.
- Retain a post-closing reserve.
Frequently asked questions
01Does one point always reduce the rate by the same amount?
No. The price of the rate reduction varies by lender, market and loan. One point describes the fee as a percentage of principal.
02Are lender credits free money?
They commonly accompany a higher rate. Evaluate the documented offer over your expected holding period and compare the cash preserved with the future cost.
Primary sources and further reading
Always verify the date, scope and local application before using a source for a specific decision.
Independent educational information. Not legal, tax, lending, or investment advice. Verify local rules and consult licensed professionals before making a real estate decision.
Compare Loan Estimates line by line
Normalize the loan assumptions, isolate lender-controlled charges and reconcile payment, cash to close and rate-lock risk.
Read the file
Mortgage rate locks: compare the deadline and the full cost
Understand what a mortgage rate lock protects, when it expires and how extensions, points and changed loan assumptions affect the offer.
Read the file
Refinancing: compare break-even, remaining debt and loan term
Compare refinancing with keeping the existing mortgage using actual fees, remaining term, monthly savings and the balance at your planned sale date.
Read the file