Mortgage Points: Are They Worth It? How to Find the Break-Even

Lenders often offer to lower your interest rate if you pay extra at closing. Those payments are called discount points. Whether they are worth buying comes down to one question: how long will you keep the loan?

What a point is

One discount point costs 1% of the loan amount and is paid at closing. On a $400,000 loan, one point is $4,000. In return, the lender reduces your rate. How much it drops varies by lender, loan type and the day, so there is no fixed rule. Get the exact tradeoff in writing on your Loan Estimate.

Points are different from the lender’s origination charges. They are optional prepaid interest. The opposite also exists: you can accept a slightly higher rate in exchange for a lender credit that reduces your closing costs.

A worked example

Suppose you are borrowing $400,000 on a 30-year fixed loan, and the lender offers two choices:

Option	Rate	Cost of points	Monthly principal and interest
No points	7.00%	$0	$2,661.21
One point	6.75%	$4,000	$2,594.39

The point saves $66.82 a month. To recover the $4,000 you paid, divide:

Break-even = cost of points ÷ monthly savings = $4,000 ÷ $66.82 ≈ 60 months

You would need to keep the loan for about five years before the point pays for itself. If you keep it ten years, you come out ahead. If you sell or refinance in three, you lose money.

How to decide

Pay points when:

• You are confident you will keep the loan well past the break-even date.
• You have cash to spare after the down payment, closing costs and an emergency fund.
• The rate reduction is meaningful for what each point costs.

Skip points, or take a lender credit, when:

• You might move or refinance within a few years. A refinance restarts the clock on any points you paid.
• Cash is tight. A larger down payment or reserves usually do more for you than a small rate cut.
• Rates may fall, which would make refinancing attractive.

Check it in the APR

APR folds points and certain fees into a yearly rate, which makes offers with different points easier to compare. A loan with points has a lower interest rate but a higher spread between rate and APR. Use the APR calculator to see it. Remember that APR assumes you keep the loan for the full term, so for a short stay compare the total cost over your expected period instead.

Tax treatment

Points paid on a purchase may be deductible in some cases, and the rules differ for refinances. Because the details depend on your tax situation, ask a tax professional rather than counting on a deduction when you decide.

Quick checklist

1. Ask for quotes at several point levels, including zero.
2. Calculate the break-even for each: cost of points ÷ monthly savings.
3. Compare it with how long you realistically expect to keep the loan.
4. Make sure the lower payment still fits your budget with or without the points.

Common questions

Can I negotiate points?

Yes. The price of a point and the rate reduction it buys are set by the lender, and they vary. Ask for quotes at several point levels, and compare quotes from more than one lender.

Do points reduce my APR?

Points lower your interest rate and add an upfront cost. They can lower or raise the APR depending on how big the rate cut is for the price paid. That is why you calculate the break-even instead of relying on the APR alone.

What if rates drop after I buy points?

Then you may refinance, and points you paid on the original loan will not carry over. This risk is why points are a better idea when you plan to keep the loan a long time and less so when rates may be falling.

Key takeaways

• A point costs 1% of the loan and lowers the rate.
• Break-even months = cost of points divided by monthly savings.
• Pay points only if you will keep the loan well beyond the break-even.