Should You Buy Mortgage Points? The Math You Need to Know

Mortgage points explained: what discount points cost, how they reduce your rate, and the break-even calculation to decide if buying points makes financial sense.

Buying mortgage points (also called discount points) means paying money upfront to get a lower interest rate for the life of your loan. Done right, it can save tens of thousands of dollars. Done wrong, it's money wasted. The decision comes down to one number: your break-even point.

What Are Mortgage Points?

One mortgage discount point costs 1% of the loan amount and typically reduces your interest rate by 0.25% (though this varies by lender and market conditions). On a $400,000 loan, one point costs $4,000. Two points would cost $8,000. The rate reduction per point varies — always ask your lender for the exact rate-per-dollar tradeoff before deciding.

The Break-Even Calculation

The break-even point is how long you need to keep the loan (or the home) for the point purchase to pay off. Formula: Cost of points ÷ monthly payment savings = break-even in months.

Example:

• •Loan amount: $400,000
• •Rate without points: 7.0% → monthly P&I: $2,661
• •Rate with 1 point ($4,000): 6.75% → monthly P&I: $2,594
• •Monthly savings: $67
• •Break-even: $4,000 ÷ $67 = 59.7 months ≈ 5 years

If you plan to stay in the home (and keep the loan without refinancing) for more than 5 years, buying the point saves money. If you sell or refinance before 5 years, you've lost money.

When Buying Points Makes Sense

• •You plan to stay in the home long-term (7+ years)
• •You have extra cash at closing and the break-even is under 5 years
• •Rates are high and you don't expect to refinance soon
• •You're on a fixed income or tight budget and want the lowest possible monthly payment
• •The seller is paying points as part of a concession — free rate reduction with no upfront cost

When NOT to Buy Points

• •You're likely to sell or move within 3–5 years
• •You expect rates to fall and plan to refinance
• •You need the cash for other purposes (reserves, home improvements, investments)
• •The break-even period exceeds your expected time in the home
• •You're stretching to afford the down payment and closing costs already

The Opportunity Cost Question

Always ask: what else could you do with the money you'd spend on points? If you'd invest it in an index fund averaging 8–10% annually, the opportunity cost may outweigh the interest savings — especially if your break-even is 5+ years away. There's no universal right answer; it depends on your time horizon, cash position, and expected investment returns.

Temporary Buydowns vs. Permanent Points

A permanent discount point reduces your rate for the full loan term. A temporary buydown (like a 2-1 buydown) reduces your rate for 1–2 years only, then it returns to the full rate. Sellers and builders often offer temporary buydowns as incentives. Evaluate them the same way: what does the full rate look like after the buydown period, and can you afford that payment?

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