Discount points and a larger down payment are two different ways to use extra cash when you buy a home.
Discount points lower your interest rate. A larger down payment lowers your loan amount.
The CFPB explains that points, also called discount points, lower your interest rate in exchange for paying more at closing. Lender credits work the opposite way by lowering upfront costs in exchange for a higher rate.
Which option saves more depends on the math. Discount points can save more if you keep the mortgage long enough to pass the break-even point. A larger down payment can save more if it lowers the loan amount, removes private mortgage insurance, improves loan pricing or gives you a stronger equity position.
Discount Points vs. Down Payment Basics
| Option |
What It Does |
How It Saves Money |
Main Trade-Off |
| Discount Points |
You pay more at closing to lower the interest rate. |
A lower rate can reduce monthly payment and total interest if you keep the loan long enough. |
You need to recover the upfront cost through monthly savings. |
| Larger Down Payment |
You pay more upfront to reduce the loan amount. |
A lower balance reduces monthly payment and interest charged on the borrowed amount. |
It may not lower the rate unless it changes loan-to-value pricing or mortgage insurance. |
How Discount Points Save Money
A discount point is an upfront charge paid to reduce the mortgage interest rate. One point equals 1% of the loan amount. On a $400,000 loan, one point costs $4,000.
The rate reduction is not universal. A common estimate is that one point may reduce the rate by about 0.25 percentage points, but the actual reduction depends on the lender, loan type, rate lock, market conditions and borrower profile. The Loan Estimate shows the points charged and the rate offered.
Discount points save money only if the monthly savings last long enough to recover the upfront cost. That is the break-even point.
Break-even formula: Cost of points ÷ monthly payment savings = months to break even
| Example Item |
Amount |
| Loan amount |
$400,000 |
| Cost of 1 point |
$4,000 |
| Rate without points |
6.75% |
| Rate with 1 point |
6.50% |
| Estimated monthly principal and interest savings |
About $66 |
| Estimated break-even period |
About 61 months |
This example is for educational purposes only. Actual savings depend on the final loan amount, rate, points, term, taxes, insurance, mortgage insurance, closing costs and how long you keep the loan.
How a Larger Down Payment Saves Money
A larger down payment saves money by reducing the amount you borrow. A smaller loan balance means the monthly principal and interest payment is lower and interest is charged on a smaller amount.
For example, using an extra $4,000 toward the down payment on a 30-year mortgage at 6.75% reduces the loan balance by $4,000. That saves about $26 per month in principal and interest.
| Use Of $4,000 Extra Cash |
Loan Impact |
Estimated Monthly Principal And Interest Impact |
| Buy 1 discount point |
Rate drops from 6.75% to 6.50% on a $400,000 loan. |
About $66 lower per month. |
| Increase down payment |
Loan drops from $400,000 to $396,000 at 6.75%. |
About $26 lower per month. |
In this example, points save more per month. But that does not mean points are always better. If the larger down payment changes mortgage insurance, interest rate pricing or loan eligibility, the down payment may save more.
When Discount Points May Save More
Discount points may save more when the lower rate creates meaningful monthly savings and you expect to keep the loan beyond the break-even period.
You expect to keep the mortgage long enough
If points cost $4,000 and save about $66 per month, the break-even period is about 61 months. If you keep the loan for 10 years, the savings continue after break-even. If you sell or refinance after three years, the points may not have enough time to pay off.
The larger down payment does not change mortgage insurance
If the extra down payment only reduces the principal by a small amount and does not remove private mortgage insurance, the monthly savings may be limited. In that case, points may produce a larger monthly payment reduction.
You have enough cash after closing
Points use cash upfront. They may be more practical when the borrower still has enough money left after closing for reserves, repairs, moving costs and other expenses.
When a Larger Down Payment May Save More
A larger down payment may save more when it changes the loan structure, not just the balance. The biggest example is private mortgage insurance on a conventional loan.
The larger down payment helps avoid PMI
Conventional loans often require private mortgage insurance when the borrower puts less than 20% down. The Federal Reserve’s summary of the Homeowners Protection Act says borrowers have the right to request PMI cancellation once the loan balance reaches 80% of the property’s original value. It automatically cancels at 78% LTV.
If extra down payment money gets you to 20% down, the savings may include a lower loan balance and no monthly PMI. That can beat the monthly savings from points.
The larger down payment improves loan-to-value pricing
Loan-to-value ratio, or LTV, compares the mortgage amount with the home value. A lower LTV can affect pricing on some loans. If a larger down payment moves the loan into a better pricing tier, it may reduce costs more than a small rate buydown.
The borrower wants more equity from day one
A larger down payment builds more equity immediately. That can matter if the borrower wants a lower balance, more protection against home-price changes or a stronger position for a future refinance or sale.
Discount Points vs. Larger Down Payment Example
The table below uses a $500,000 home purchase and compares two ways to use an extra $5,000. It assumes a 30-year fixed-rate mortgage and excludes taxes, insurance, PMI, HOA dues and closing costs.
| Scenario |
Loan Amount |
Rate |
Estimated Principal And Interest |
Monthly Savings vs. Baseline |
| Baseline |
$400,000 |
6.75% |
$2,594 |
Baseline |
| Buy 1 point |
$400,000 |
6.50% |
$2,528 |
About $66 |
| Put $5,000 more down |
$395,000 |
6.75% |
$2,562 |
About $32 |
This example shows why points can look stronger on monthly payment when the larger down payment only reduces principal. The result can change if the larger down payment eliminates PMI, improves pricing or changes loan eligibility.
The PMI Threshold Can Change the Answer
The 20% down threshold can be a major decision point on conventional loans. If extra cash moves the borrower from below 20% down to 20% down, the larger down payment may save more because it can avoid monthly PMI.
For example, on a $500,000 home, 20% down is $100,000. If a borrower is close to that threshold, using extra cash toward the down payment may reduce the loan amount and help avoid PMI. If the borrower is far below that threshold, points may create more monthly payment savings for the same cash amount.
| Extra Cash Does... |
Option That May Save More |
Reason |
| Only reduces principal slightly |
Discount points may save more monthly. |
A lower rate applies to the full loan balance. |
| Gets the borrower to 20% down |
Larger down payment may save more. |
It may eliminate PMI and reduce principal. |
| Moves the loan into better pricing |
Larger down payment may save more. |
Lower LTV can affect rate or fee pricing. |
| Keeps the borrower past break-even |
Discount points may save more long term. |
Monthly savings continue after points break even. |
What To Compare Before Choosing
The right choice depends on more than the monthly payment. Compare the upfront cost, break-even point, mortgage insurance, rate, closing costs and expected time in the loan.
- Calculate the points break-even period. Divide the cost of points by the monthly savings.
- Check whether the larger down payment changes PMI. This is often the biggest swing factor.
- Compare the Loan Estimate options. Review the rate, APR, points, lender credits and cash to close.
- Review post-closing reserves. Using extra cash at closing may leave less money for repairs, moving costs or emergencies.
- Think about the likely loan timeline. Points are less useful if the borrower expects to sell or refinance before break-even.
- Ask about tax treatment carefully. IRS Publication 936 discusses home mortgage interest and points, but deductibility depends on the borrower’s tax situation.
The Bottom Line
Discount points and a larger down payment can both reduce mortgage costs, but they work in different ways. Points lower the interest rate, while a larger down payment lowers the amount borrowed.
Discount points may save more when the borrower keeps the mortgage beyond the break-even point and the larger down payment does not change PMI or pricing. A larger down payment may save more when it eliminates PMI, improves loan-to-value pricing, reduces the loan balance meaningfully or preserves more equity from the start.
Frequently Asked Questions
Is It Better To Buy Points Or Put More Money Down?
It depends on the break-even period, PMI, loan pricing and how long the borrower expects to keep the mortgage. Points can reduce the rate, while a larger down payment reduces the loan amount and may help avoid PMI.
Do Discount Points Save More Than a Larger Down Payment?
Discount points can save more per month when the larger down payment only reduces principal. A larger down payment can save more if it eliminates PMI, improves loan pricing or changes loan eligibility.
How Do I Calculate Whether Points Are Worth It?
Divide the cost of the points by the monthly payment savings. The result is the break-even period in months. If the borrower keeps the loan longer than that, points may produce savings.
How Much Does One Discount Point Cost?
One discount point costs 1% of the loan amount. On a $400,000 mortgage, one point costs $4,000.
How Much Does One Point Lower a Mortgage Rate?
One point often lowers the rate by about 0.25 percentage points, but the actual reduction varies by lender, loan type, market conditions and rate-lock pricing.
Does a Bigger Down Payment Always Lower My Rate?
Not always. A larger down payment lowers the loan amount, but it may not lower the interest rate unless it changes loan-to-value pricing, mortgage insurance or program eligibility.
Should I Put More Down To Avoid PMI?
Putting more down may save money if it helps avoid PMI on a conventional loan.
Are Discount Points Refundable If I Refinance?
No. Discount points are paid at closing and are generally not refundable. If the borrower refinances before break-even, some or all of the upfront cost may not be recovered through monthly savings.
Are Discount Points Tax-Deductible?
Points may be deductible under certain IRS rules, but tax treatment depends on the loan purpose, timing, itemization and the borrower’s tax situation. IRS Publication 936 discusses points and home mortgage interest.
What Should I Compare On the Loan Estimate?
Compare the interest rate, APR, discount points, lender credits, monthly payment, cash to close and whether the larger down payment affects PMI.
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