What it means
Points turn a financing decision into a simple trade: cash today against smaller payments for years. The lender receives money at closing that compensates it for accepting a lower yield over the term, so neither side is doing the other a favour.
The economics hinge entirely on how long you keep the loan. Because the saving arrives monthly and the cost is paid once at the start, there is a breakeven point in months after which the buyer of points is ahead.
Sell the property, refinance, or repay early before that date and the points were wasted money. Points are quoted separately from origination fees, and this distinction matters.
An origination point is a charge for arranging the loan and buys you nothing; a discount point genuinely reduces the rate, and only discount points may be treated as prepaid interest for tax purposes in the jurisdictions that allow it. Businesses meet points on commercial mortgages, equipment finance and some term loans, not just residential lending.
The calculation is identical, but the decision is usually framed against the alternative use of that cash, so a company earning a good return on working capital may rationally decline points even when the breakeven looks short. Rates and points are quoted together as a grid, and the exchange rate between them moves with the market.
It is worth asking a lender for two or three rate and point combinations rather than accepting the single option presented, because the trade is often more or less attractive at different points on that grid.
In practice
Real-world examples.
Example
A dental practice borrows $650,000 to buy its premises and is offered 1 point to move from 7.0% to 6.75%. The partners plan to stay for at least fifteen years, so the $6,500 cost pays back well inside the term and they take the points.
Example
A property developer takes a three-year bridge loan and is offered 2 discount points for a lower rate. Because the loan will be repaid on completion of the sale, well before breakeven, the developer declines and keeps the cash for the build budget.
Example
A logistics company financing a $900,000 warehouse extension asks its lender for three rate and point combinations rather than one. The middle option, half a point for a 0.15% rate cut, has the shortest breakeven of the three and is the one the board approves.
Formula
Calculation
Cost of points = Loan amount x points as a percentage. Breakeven months = Cost of points / Monthly payment saving. Take a $400,000 commercial mortgage over 30 years. At 6.5% the monthly payment is $2,528.27. Paying 2 discount points cuts the rate to 6.0%, where the monthly payment is $2,398.20. Cost of points = $400,000 x 2% = $8,000. Monthly saving = $2,528.27 - $2,398.20 = $130.07. Breakeven = $8,000 / $130.07 = 61.5 months, or a little over five years. A borrower confident of holding the loan for ten years buys the points; one expecting to refinance within four years does not.Case study
Seen in the real world.
Cedarmill Ceramics is a fictional mid-sized manufacturer used here to illustrate the trade. It refinanced a $400,000 mortgage on its factory and was offered the choice above: 6.5% with no points, or 6.0% for 2 points costing $8,000. The finance manager calculated the breakeven at 61.5 months and recommended paying the points, because the company had no intention of moving and the loan had 30 years to run.
The board pushed back for a good reason. Cedarmill was about to spend on a new kiln that it expected to generate a return well above the roughly 19% annualised return implied by recovering $8,000 through $130.07 of monthly savings over the loan's life. The comparison was not points against nothing; it was points against the next best use of $8,000.
In the end Cedarmill took a half-point option, spending $2,000 for a smaller rate reduction, and put the rest into the kiln. The illustrative lesson is that the breakeven calculation answers only half the question, and the other half is what else that cash could do.
Watch out
Common mistakes.
- Confusing discount points with origination points, and assuming any fee quoted in points must be buying a lower rate.
- Ignoring how long the loan will actually be held, which is the single variable that decides whether points pay off.
- Comparing the point cost only against the monthly saving, without asking what return the same cash would earn elsewhere in the business.
Questions
People also ask.
How much does one point usually reduce the rate?
There is no fixed exchange rate, but a reduction of roughly 0.125% to 0.25% per point is common, and lenders publish their own grid.
Can discount points be negotiated?
Yes, and lenders will often quote several rate and point combinations, including negative points where you accept a higher rate in return for a credit towards closing costs.
Are discount points refundable if I repay the loan early?
No, they are paid at closing and are not returned, which is precisely why the breakeven period matters so much.
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