Points are the most straightforward cost in a loan and the most commonly misunderstood in comparison. They hit your cash at closing rather than your monthly payment, which makes them expensive in a different way than rate.
These questions cover how points work and when paying them is worthwhile.
Quick answer
One point equals one percent of the loan amount, charged at closing. On a $400,000 loan, one point is $4,000. Points paid to reduce the rate only pay off if you hold the loan long enough to recover the upfront cost.
Frequently Asked Questions
What is a point?
One percent of the loan amount, paid at closing. On a $400,000 loan, one point is $4,000.
What is the difference between origination and discount points?
Origination points compensate the lender for making the loan. Discount points are paid specifically to buy down the interest rate. In practice on investor loans the distinction is often blurred.
How many points are typical on a DSCR loan?
Commonly one to two points, though this varies by lender, loan size, and whether you are buying down the rate. Smaller loans sometimes carry higher point structures.
Do points affect my monthly payment?
Not directly. Points are paid at closing. Discount points indirectly lower your payment by reducing the rate.
How do I know if paying points is worth it?
Calculate the break-even: divide the point cost by the monthly payment savings. If it takes 48 months to recover and you plan to refinance in 24, paying points loses money.
Can points be financed into the loan?
Sometimes, though this increases your loan amount, which raises your payment and lowers your coverage ratio. It is rarely the better option if you have the cash.
Are points tax-deductible on an investment property?
Points on investment property are generally amortized over the loan term rather than deducted immediately. Tax treatment depends on your situation — consult a CPA.
Do points count toward my cash to close?
Yes. Points are part of closing costs and must be budgeted alongside your down payment and reserves.
Can I negotiate points?
Often the rate-versus-points trade-off is negotiable. Most lenders will move one to move the other, which is more useful than trying to eliminate points entirely.
Are points refundable if the loan doesn't close?
Generally points are paid at closing, so they are not charged if the loan does not close. Application or appraisal fees paid earlier are typically non-refundable.
Do all lenders charge points?
Most investor lenders do. A lender advertising no points is generally pricing the rate higher, which may or may not be better for your hold period.
How do points compare to a higher rate?
Points cost cash now; rate costs cash monthly. Over a long hold, paying points to lower the rate usually wins. Over a short hold, taking the higher rate and preserving cash usually wins.
Do points differ on a refinance?
Structures are broadly similar. On a cash-out refinance, points are often taken from proceeds rather than paid separately, which reduces your net cash out.
Should a BRRRR investor pay points?
Usually not on the acquisition loan, since the plan is to refinance within months. Paying to buy down a rate you will not hold is money spent for nothing.
Do points appear on my loan estimate?
Yes. They should be clearly disclosed on any term sheet or estimate. If you cannot find the point structure on a quote, ask directly.
Can seller concessions cover points?
Sometimes, subject to limits. Seller concessions generally apply to closing costs, which can include points, though caps apply and vary by program.
Do points affect my coverage ratio?
Only indirectly. Points paid in cash do not affect the ratio. Points financed into the loan increase the loan amount and payment, which lowers the ratio.
Is a two-point loan always worse than a one-point loan?
No. A two-point loan at a materially lower rate can cost less over a long hold. Compare total cost across your intended holding period rather than comparing points alone.
What is a typical break-even period?
It varies with the rate reduction achieved, but 36 to 60 months is a common range. If your hold plan is shorter than the break-even, do not pay the points.
How should points factor into comparing lenders?
Convert everything to total cost over your realistic hold. A lender with lower points and a higher rate may be cheaper if you refinance in two years, and more expensive if you hold for ten.
