Points (Loan Points)
Points (Loan Points), in short
One point equals 1% of the loan amount, paid to the lender at closing. Discount points are prepaid interest that lowers your rate; origination points are a fee for underwriting and funding the loan. On a $1,400,000 loan, one point costs $14,000. Whether points pay off depends on how long you keep the loan before selling or refinancing.
Also called loan pointsmortgage pointsdiscount pointsorigination pointspoints and fees
How points work
Cost of points = Loan Amount × Number of Points × 1%
A point is one percent of the loan, collected by the lender at closing. It is a unit of price, not a type of fee, and that is where most of the confusion starts. When a lender writes “1.5 points” on a term sheet, the loan is $1,400,000 × 1.5% = $21,000, and the question you need answered is what that $21,000 is for.
There are two answers, and they behave very differently.
- Discount points are prepaid interest. You pay money now and the lender lowers your interest rate for the life of the loan. They are optional and negotiable: you can ask for a quote at several point levels.
- Origination points are a fee for underwriting, documenting and funding the loan. They do not lower your rate. They are the same charge as an origination fee, simply stated as a percentage of the loan.
Some quotes mix the two. A lender may charge a point of origination and offer additional points to buy the rate down. Ask for each line separately.
Worked example: does a point pay for itself?
Our standard deal: a $2,000,000 purchase with $600,000 down and a $1,400,000 loan, 25-year amortization, 10-year term. The lender offers two options:
| Option | Rate | Points at closing | Monthly payment |
|---|---|---|---|
| A — no points | 7.00% | $0 | $9,895 |
| B — 1 point | 6.75% | $14,000 | $9,673 |
The rates are example values, not a current quote, and the cost of a rate reduction varies by lender and by the day. Payments come from our commercial mortgage calculator.
Option B saves about $222 a month, or about $2,666 a year. The $14,000 up front divided by $222 is about 63 months: roughly five years and three months of payments before the savings catch up with the cost. The picture is slightly better than that because the lower rate also pays down more principal. Counting both the payment savings and the extra principal paid, the points work out like this:
| You pay the loan off after | Payment savings | Extra principal paid down | Net after $14,000 |
|---|---|---|---|
| 3 years | $7,997 | $2,507 | −$3,496 |
| 5 years | $13,329 | $4,148 | +$3,477 |
| 7 years | $18,660 | $5,713 | +$10,373 |
| 10 years (maturity) | $26,658 | $7,788 | +$20,446 |
So the break-even sits between years three and five, and the real question is not the rate. It is how long you will hold the loan. If you plan to sell or refinance in three years, the point costs you $3,496. If you will hold to maturity, it earns $20,446. Plenty of commercial loans never reach maturity, which is why the answer depends on your business plan more than on the arithmetic.
Points vs. other costs people confuse them with
- Points vs. interest rate. They trade against each other. More points, lower rate; fewer points, higher rate. Compare quotes at the same point level or compare total cost over your expected hold.
- Points vs. APR. A properly calculated APR folds the fees into the rate. See our APR explainer for why a lower rate with points is not automatically the cheaper loan.
- Points vs. exit fees and prepayment penalties. Points are paid when you get the loan. Exit fees and prepayment charges are paid when you leave it. Short-term bridge and hard money loans often charge both, so count both.
- Points vs. third-party costs. Appraisal, environmental report, title and legal fees go to other parties, not the lender, and do not count as points.
Why lenders charge points
For the lender, a point is upfront income. A loan that may be repaid in three years earns three years of interest; points make the lender's return less dependent on how long the loan stays. That is why short-term loans lean on them. Bridge loans are priced at about 6.25–8.25% and hard money at about 9–13%, and the point charge is a bigger share of the total cost on a 12-month loan than on a 10-year one. On a one-year loan, two points are an extra two percentage points of cost over the year: $28,000 on $1,400,000, on top of the interest.
Discount points are also how lenders price certainty. A borrower who expects to hold the loan and wants the lowest payment, perhaps to keep the DSCR comfortably above the lender's minimum, can buy that. In our example the lower payment lifts the debt service coverage ratio on $180,000 of net operating income from 1.52 to 1.55. That is a modest improvement, and a lender does not need buy-downs to size a loan that already clears its minimum, but when a deal is right at the line, a point or two can be the difference.
What to watch for
- Ask what the points are for. If none of the quoted points lowers the rate, they are a fee, and fees are negotiated differently from rate buy-downs.
- Check whether points come out of the proceeds. On a $1,400,000 loan with one point netted, $1,386,000 reaches closing, and you repay $1,400,000. If you need $1,400,000 in hand to complete the purchase, the loan has to be larger. Get the net funding figure in writing.
- Match the buy-down to your hold period. Use a breakeven calculator. If a prepayment penalty or lockout keeps you in the loan, your hold is longer than you thought, which helps points. If you may refinance when rates fall, it hurts them.
- Get the quotes with and without points. A lender who will only quote one structure is making the choice for you.
- Know when the price is fixed. A rate and point combination holds only while it is locked; see rate lock. Rates moving between quote and closing can change what a point buys.
- Do not stack points on points. A broker fee, a lender origination fee and a lender buy-down can all be written as points. Add them up as one dollar figure and compare it between lenders. If you are working with us, we will tell you how the lender and broker compensation is structured.
Taxes
IRS Publication 535 describes points as prepaid interest, which generally cannot be deducted in full in the year paid. For business and investment property they are generally deducted over the term of the loan, with an exception for small amounts. The rule that lets a homeowner deduct points on a primary residence in the year paid is tied to home-purchase tests and generally does not carry over to a commercial loan. How this applies depends on the borrowing entity and the loan, so check with your CPA before closing, not after.
Points on different commercial loan types
- Bridge and hard money loans usually charge points as a core part of the price, often alongside an exit fee. Compare the total cost over the actual term, not the coupon.
- SBA loans carry fees set by SBA rules, such as the SBA 7(a) guaranty fee, rather than lender points alone. On an SBA 504 or SBA 7(a) loan, ask the lender and the CDC to itemize every fee in dollars.
- CMBS and agency loans are priced as a spread over a benchmark. Ask for the fees and any rate buy-down stated as separate dollar lines. Our CMBS page covers the structure.
If you are comparing offers, send us the term sheets and we will put each one on the same footing: rate, points, netted proceeds and the cost to your expected exit.
Sources: IRS Publication 535, Business Expenses, Chapter 4 (Interest: points). Payment, balance and break-even figures calculated with the BestLoanUSA commercial mortgage calculator formula; the 7.00% and 6.75% rates are example values, not a quote.
Frequently asked
What is a point on a commercial loan?
A point is one percent of the loan amount, charged by the lender at closing. Two points on a $1,400,000 loan is $28,000. The word covers two different charges: discount points, which are prepaid interest that lowers your rate, and origination points, which are a fee for making the loan and do not lower the rate.
Are points the same as an origination fee?
Not always. An origination fee is one kind of point: a percentage of the loan paid for underwriting and funding it. Discount points are different because they buy a lower rate. Lenders sometimes quote a single “2 points” figure without saying which kind it is, so ask whether any of it reduces the interest rate.
How do I know if paying points is worth it?
Divide the cost of the points by the monthly payment savings. That is your break-even in months. If you expect to sell or refinance sooner, the points cost more than they save. In our $1,400,000 example, one point lowering the rate from 7.00% to 6.75% takes about 63 months on payment savings alone.
Are loan points tax deductible on investment property?
Points are prepaid interest, so for business and investment property IRS Publication 535 generally has you deduct them over the term of the loan rather than all in the year paid, with an exception for small amounts. The home-mortgage rules for deducting points in full in year one generally do not carry over. Ask your CPA how it applies to your entity and loan.
Can points be negotiated or paid out of the loan proceeds?
Often both. Origination points are the more negotiable of the two, and a competing written quote is the best lever. Many lenders deduct points from the loan proceeds at closing instead of collecting them separately, so you receive less cash than the loan amount while repaying the full amount. Get the net funding figure in writing.