What is the difference between discount points and lender credits?

Discount points are upfront fees you pay to permanently lower your interest rate — typically 1% of the loan buys 0.25% rate reduction. Lender credits are the reverse: the lender gives you cash back at closing in exchange for you accepting a higher rate. Points reduce your monthly payment; credits reduce your out-of-pocket costs today but increase your monthly cost.

When should I buy points instead of taking a lender credit?

Buy points if you plan to keep the loan for 7 or more years. The monthly savings from a lower rate compound over time and eventually exceed the upfront point cost. For a $400,000 loan at 7%, buying one point saves roughly $67 per month. At $4,000 cost, you break even in about 60 months and save thousands afterward.

Are mortgage points tax deductible?

Yes, for a home purchase. Discount points paid on a purchase mortgage are fully deductible in the year paid on Schedule A. For a refinance, points must be amortized and deducted over the life of the loan. Lender credits are not taxable income, but they reduce your deductible mortgage interest basis since your rate is higher.

What is the par rate on a mortgage?

The par rate is the interest rate at which a lender charges zero points and offers zero credits — it is the break-even point on the lender's rate sheet. Rates below par cost money (discount points); rates above par generate lender credits. Your specific par rate depends on your credit score, loan type, LTV, and market conditions that day.

Points vs Lender Credits Calculator

Compare buying discount points (lower rate, higher upfront cost) against taking lender credits (higher rate, cash back at closing) and the par rate baseline. Find the option that saves you the most money based on how long you plan to stay.

Loan Amount

Base Rate (Par Rate)

Cost to Buy 1 Point

Lender Credit Amount

Loan Term

yrs

Three-Way Rate Comparison

Buy 1 Point

6.8%

$2,594/mo

Pay $4,000 upfront

Base Rate

7.0%

$2,661/mo

No cost, no credit

Take Credit

7.3%

$2,729/mo

Receive $4,000 back

Points Monthly Savings vs Base

$67/mo

Savings from buying 1 point

Credit Extra Cost vs Base

$67/mo

Extra monthly cost for taking credit

Total Interest (Points)

$533,981

6.8% over 30 yrs

Total Interest (Credit)

$582,334

7.3% over 30 yrs

Advanced

Break-Even Analysis & Stay-Length Strategy

Short-stay vs long-stay decision framework and break-even timelines

How Long You Plan to Stay

years

Points Break-Even

5.0 years

$4,000 cost / $67/mo savings

Points pay off — you stay past break-even

Credit Cost Point

5.0 years

$4,000 received / $67/mo extra cost

Credit costs more than received — you stay too long

Net cost at 7 years:

Buy Points

Net savings

Base Rate

Baseline

Take Credit

$1,670

Credit fully consumed

Pro

Rate Sheet Mechanics, Industry Caps & No-Cost Refi

How lender pricing engines work and advanced credit strategies

Every lender uses a "rate sheet" — a pricing matrix that shows the relationship between interest rate and cost/credit. Understanding this gives you negotiating power.

Rate	Cost/Credit	Monthly Payment	Total Interest	vs Par
6.5%	Pay $8,000	$2,528/mo	$510,178	-$47,858 interest
6.8%	Pay $4,000	$2,594/mo	$533,981	-$24,054 interest
7.0% (PAR)	$0	$2,661/mo	$558,036	Baseline
7.3%	Receive $4,000	$2,729/mo	$582,334	+$24,298 interest
7.5%	Receive $8,000	$2,797/mo	$606,869	+$48,833 interest

What to look for on your Loan Estimate: The Loan Estimate (page 2, section A) shows origination charges. A positive number is a fee you pay; a negative number is a credit. The par rate appears when this section shows $0. Your lender is required to disclose this format under RESPA.

How to Use This Calculator

Enter your Loan Amount and Base Rate (the par rate your lender quoted with no points or credits). Then enter the Cost to Buy 1 Point (typically 1% of loan = 0.25% rate reduction) and the Lender Credit Amount available in exchange for a 0.25% rate increase. The calculator instantly shows all three options side by side with payments, total interest, and break-even timelines.

The "Stay Length Strategy" tab in the Advanced section is the most actionable analysis — enter how long you realistically plan to keep this mortgage and get a direct recommendation.

Points vs Credits Formula

Rate with Points = Base Rate - (Points x 0.25%)
Rate with Credits = Base Rate + (Credit / Loan Amount / 0.01 x 0.25%)

Monthly Savings (Points) = Payment(Base Rate) - Payment(Lower Rate)
Break-Even Months (Points) = Point Cost / Monthly Savings

Monthly Extra Cost (Credits) = Payment(Higher Rate) - Payment(Base Rate)
Credit Payback Period = Credit Amount / Monthly Extra Cost

Points and credits are mirror images of each other on the lender's rate sheet. Every 0.25% rate change typically corresponds to roughly 1% of the loan amount in points or credits, though the exact pricing varies by lender, day, and loan profile.

Example: $400,000 Loan at 7.0% Par Rate

Three Options Compared

	Buy 1 Point	Base Rate	Take Credit
Interest Rate	6.75%	7.00%	7.25%
Monthly Payment	$2,594	$2,661	$2,729
Upfront Cost/Credit	-$4,000	$0	+$4,000
Break-Even	~5 years	N/A	~5 years
Best For	Stay 7+ years	Stay 5-7 years	Stay under 5 years

At 7 years, buying the point has saved $5,628 in payments while costing $4,000 upfront — net gain of $1,628. At 7 years, the credit has cost $5,712 in extra payments while providing $4,000 upfront — net loss of $1,712. The break-even is symmetric, but the decision is asymmetric: your stay length determines everything.

Frequently Asked Questions

Discount points are upfront fees that permanently lower your interest rate. One point equals 1% of the loan amount and typically buys a 0.25% rate reduction. Lender credits are the opposite: the lender pays you cash at closing in exchange for a higher rate. Points reduce monthly cost; credits reduce closing costs. Both are traded on the lender's rate sheet — understanding this gives you negotiating leverage.

Buy points if you plan to keep the loan for 7 or more years. The monthly savings from a lower rate compound over time and exceed the upfront cost. For a $400,000 loan at 7%, buying one point saves roughly $67 per month. At $4,000 cost, you break even in about 60 months (5 years) and save thousands afterward. The longer you stay, the more valuable points become.

Take lender credits if you plan to sell or refinance within 5 years, or if you need to minimize out-of-pocket closing costs. Credits are especially valuable in a no-cost refinance where credits cover all closing costs, letting you lower your rate without spending any cash. If rates drop and you expect to refinance again within a few years, the credit model wins decisively.

For a home purchase, discount points are fully deductible in the year paid if you itemize deductions. This makes the effective cost of points lower than the face value. For a refinance, points must be amortized and deducted ratably over the loan term — a much smaller annual deduction. Lender credits are not taxable income, but accepting a higher rate means less deductible mortgage interest over time.

The par rate is the rate where you pay zero points and receive zero credits — it is the break-even on the lender's rate sheet. Ask your lender: "What is the rate with no origination charge and no lender credit?" That is your par rate. Rates above par generate credits; rates below par cost money. Your Loan Estimate (page 2, section A) will show origination charges — a negative number means you are receiving credits.