Mortgage Points: When Does Paying Points Make Sense?

Discount points let you pay more upfront in exchange for a lower interest rate. Whether that's a good deal depends mostly on one question: how long will you keep the loan?

What a point is

One point equals 1% of the loan amount. On a $500,000 loan, one point is $5,000.

How much a point lowers your rate varies by lender and market conditions. There's no fixed conversion, so you have to compare actual quotes.

You'll see points listed in Section A of your Loan Estimate.

The opposite: lender credits

You can also go the other direction. You take a slightly higher rate, and the lender gives you a credit toward closing costs. That lowers your cash to close but raises your payment.

So most loans offer a range: pay more now for a lower rate, pay less now for a higher rate, or something in the middle.

The break-even calculation

Here's the simple way to evaluate points:

Break-even (months) = cost of points ÷ monthly savings

An example

These numbers are for illustration only. On a $600,000 loan:

• Option A: 6.75% with no points. Principal and interest is about $3,892.
• Option B: 6.375% with one point ($6,000). Principal and interest is about $3,743.

Monthly savings: about $149.

Break-even: $6,000 ÷ $149 ≈ 40 months, or about three and a half years.

If you keep the loan longer than that, paying the point saves money. If you sell or refinance sooner, you'd have been better off not paying it.

When points may make sense

• You plan to stay in the home and keep this loan for many years.
• Rates seem unlikely to drop enough for a refinance to make sense soon. No one can predict this, but it's part of the thinking.
• You have extra cash at closing and won't drain your reserves.
• A seller is offering credits that can be used toward points.

When points may not make sense

• You might move, sell or refinance within a few years.
• Paying points would leave you with too little cash after closing.
• The rate reduction per point is small in the current market.
• You expect income to rise and might pay the loan off early.

A few other things to consider

Cash is flexible

Money you keep in the bank can cover emergencies, repairs or investments. Money spent on points is locked into the loan. Make sure you're comfortable with that trade.

Refinancing resets the clock

If rates drop and you refinance, the points you paid on the original loan don't carry over. That's the main risk.

Taxes

Points may be tax-deductible in some situations. Rules depend on your circumstances, so check with a tax professional.

Temporary buydowns are different

A temporary buydown lowers your rate for the first year or two only. See temporary rate buydowns.

Comparing options

When I prepare options for clients, I usually show a few side by side: no points, a lender credit, and one or two point options, with the break-even for each. Seeing them together tends to make the decision clearer.

Questions?

If you'd like to see your own break-even math, contact me, or start your pre-approval and I'll lay out the options for your scenario.