A loft payment is money you pay upfront when you buy a home with an adjustable-rate mortgage, to lower the interest rate you'll pay over time.

The term "loft" stands for "loan origination fee" or sometimes refers to points — fractions of your loan amount that you buy down to reduce your rate. When you pay points at closing, you're paying a percentage of your total loan to the lender in exchange for a lower monthly payment and less interest paid over the life of the loan. One point equals 1% of your loan amount. Two points on a $300,000 loan, for example, costs $6,000 upfront but might lower your rate by 0.5% or more.

Not every mortgage requires a loft payment. Many borrowers skip points entirely and accept a higher rate to keep closing costs down. Others pay points because they plan to stay in the home long enough to recoup the upfront cost through lower monthly payments. The decision depends on your cash position at closing, how long you expect to own the home, and current market rates.

Key Takeaways

  • Loft payments (points) are optional fees you pay at closing to reduce your mortgage interest rate, typically costing 1% of your loan amount per point.
  • Paying points makes financial sense only if you plan to stay in the home long enough for the monthly savings to exceed what you paid upfront — usually five to seven years.
  • You can negotiate with the seller to cover some or all of your points as part of the purchase agreement, or the lender may offer a no-point option at a higher rate.
  • Points are tax-deductible in the year you pay them if you itemize deductions, though rules vary depending on whether the loan is for a primary residence or investment property.

How points reduce your interest rate

Lenders price mortgages based on risk and market conditions. When you pay points, you're essentially prepaying interest to the lender, which compensates them for offering you a lower rate than you'd otherwise receive. The more points you pay, the lower your rate drops — but the relationship is not linear. The first point typically saves you more in rate reduction than the second or third.

Your lender will show you a rate sheet during the loan process that lists several rate and point combinations. A common scenario might look like this: 6.5% with zero points, 6.25% with one point, or 6.0% with two points. You choose which combination fits your budget and timeline. The lower rate means a lower monthly payment, which saves you money every month for as long as you hold the loan.

When paying points makes financial sense

Paying points is a trade-off: you spend money now to save money later. The break-even point — the month when your monthly savings equal your upfront cost — determines whether the investment pays off. If you plan to sell or refinance before reaching break-even, you lose money on the points.

To calculate your break-even, divide the cost of the points by your monthly payment savings. If you pay $6,000 in points and save $150 per month, your break-even is 40 months, or about 3.3 years. If you stay in the home longer than that, you come out ahead. If you sell before then, you don't recover the cost. Most financial advisors suggest points make sense if you plan to stay at least five to seven years, though this varies based on rates and your personal situation.

Paying points also makes more sense when rates are high and the rate reduction is substantial. In a 3% rate environment, the difference between 3.0% and 2.75% may not justify the upfront cost. In a 7% environment, dropping to 6.5% might be worth it.

Who pays for loft points

You don't have to pay points yourself. In many transactions, the seller covers some or all of them as a concession during negotiation. This is called a "seller credit" or "seller concession." The seller agrees to contribute a certain dollar amount toward your closing costs, which you can direct toward points, appraisal fees, title insurance, or other expenses.

Lenders also sometimes offer "lender credits" — the opposite arrangement. Instead of you paying points, the lender offers you a higher rate in exchange for paying some of your closing costs. This is useful if you don't have cash for closing but want to reduce your out-of-pocket expenses. The trade-off is a higher monthly payment for the life of the loan.

In some cases, the lender may offer a "no-cost" or "no-point" mortgage where they cover closing costs in exchange for a higher rate. This is most common in refinances, where the lender can roll costs into the loan balance.

Tax treatment of loft payments

Points paid on a mortgage for your primary residence are generally tax-deductible in the year you pay them, provided you itemize deductions on your tax return. The IRS treats them as prepaid mortgage interest. You'll receive a Form 1098 from your lender showing the points paid, which you report on Schedule A.

The rules are stricter for investment properties or second homes. Points on those loans must be deducted over the life of the loan, not all at once. If you refinance, any remaining points from the original loan are deducted in the year of refinance. Consult a tax professional to understand how points affect your specific situation, as rules depend on the loan type and your filing status.

Comparing points to other closing cost options

Points are one way to reduce your rate, but they're not the only option. You can also shop lenders — different lenders price the same loan differently, and switching lenders might get you a better rate without paying points. You can negotiate with the seller to cover closing costs, which frees up your cash for other purposes. You can also accept a higher rate and lower closing costs if you plan to refinance in a few years.

The best choice depends on your financial situation, how long you plan to stay, and current market conditions. A mortgage broker or loan officer can run scenarios showing you the cost and benefit of each option. Some borrowers pay points; others don't. There's no single right answer — only the choice that works for your circumstances.

What happens to points if you refinance or sell

If you sell your home before reaching the break-even point on your points, you lose the remaining value. The points don't transfer to the new owner or carry over to a new loan. This is why break-even timing matters so much — if you pay $6,000 in points but sell three years later, you've spent that money without recovering it through lower payments.

If you refinance, the old points are gone, and you start fresh with a new loan. You can choose to pay points on the new loan or not, based on the same logic: how long you plan to keep the new loan, what the rate reduction is worth, and whether you have cash available. Some borrowers refinance specifically to take advantage of lower rates without paying points, if rates have dropped enough to make refinancing worthwhile on its own.

Frequently Asked Questions

Can I pay points on a refinance?

Yes. Refinance points work the same way as purchase points — you pay a percentage of the new loan amount to lower your rate. The break-even calculation is the same: divide the cost by your monthly savings to find when the investment pays off. Refinancing makes sense only if you'll stay long enough to recoup the cost.

What's the difference between points and origination fees?

Points are optional and directly reduce your rate. Origination fees are mandatory charges the lender collects for processing the loan, and they don't lower your rate. Both appear on your Closing Disclosure, but only points are tax-deductible. You can negotiate points; origination fees are usually non-negotiable.

If I don't pay points, will my rate be much higher?

Not necessarily. Lenders offer a range of rates at zero points. You'll pay a market rate for your credit score, loan type, and current conditions, but you won't be penalized for choosing not to buy down the rate. Many borrowers skip points and accept the standard rate for their profile.

Can I pay points with a gift or borrowed money?

Yes, but lenders have rules about the source of funds. Gift money from family is usually allowed if you provide a gift letter stating it doesn't need to be repaid. Borrowed money is generally not allowed, because it increases your debt-to-income ratio and makes you riskier to the lender. Ask your loan officer what sources are acceptable.

Do I have to decide about points before I make an offer?

No. You decide during the loan process, after you're under contract and have a clear picture of your closing costs and rate options. Your lender will present scenarios showing different point and rate combinations so you can choose the one that fits your budget and timeline.