Mortgage discount points are prepaid interest — you pay a lump sum at closing in exchange for a lower interest rate for the life of the loan. Whether they're worth it depends entirely on one number: how long you plan to keep the loan. If you stay long enough, buying points saves money. If you sell or refinance before breaking even, you've overpaid.
What One Point Actually Costs
One discount point equals 1% of the loan amount. On a $400,000 mortgage, one point costs $4,000 at closing. Each point typically reduces the interest rate by 0.25%, though this varies by lender and market conditions.
1 point = 1% of loan amount Rate reduction: typically 0.20–0.25% per point Example on $400,000 at 7.25%: • 1 point = $4,000 upfront • Rate drops to 7.00% • Monthly savings: ~$67 • Break-even: $4,000 ÷ $67 = 59 months (5 years)
The Break-Even Calculation
The only question that matters is: will you keep this loan long enough to recoup the upfront cost through monthly savings? If your break-even is 60 months and you plan to stay 10+ years, buying points is a clear win. If break-even is 60 months and you're planning to upgrade in 4 years, you'll lose money.
Tax deductibility can shorten the break-even: discount points on a purchase mortgage are fully deductible in the year paid for many borrowers. Consult a tax advisor for your situation.
| Loan Amount | Points Paid | Rate Drop | Monthly Savings | Break-Even |
|---|---|---|---|---|
| $300,000 | 1 ($3,000) | 0.25% | $50 | 60 months |
| $400,000 | 1 ($4,000) | 0.25% | $67 | 60 months |
| $600,000 | 2 ($12,000) | 0.50% | $200 | 60 months |
When Points Are Worth It
- You're buying your forever home (or plan to stay 7+ years) — the savings compound significantly over time.
- You have the cash and won't deplete your emergency fund or down payment.
- Rates are at a cyclical high and you don't expect to refinance within 3–4 years.
- The break-even is under 36 months — fast payback, low risk.
When to Skip the Points
- You might move or refinance within 5 years — most people overestimate how long they'll stay.
- You're short on liquid savings — that cash is more valuable as an emergency fund.
- Rates are elevated and likely to fall — you'd refinance and abandon the benefit.
- The lender's rate-to-point conversion is poor (e.g., only 0.125% per point).
Negative Points: Lender Credits
The reverse also works: lender credits are "negative points" where you accept a higher interest rate in exchange for the lender covering some or all of your closing costs. This makes sense if you're short on cash, don't plan to stay long, or expect to refinance. You pay more per month but nothing (or less) upfront. The break-even logic runs in reverse — how long until the higher monthly cost exceeds what you saved at closing.
Points are not inherently good or bad — they're a financial trade: upfront cash for long-term savings. Run your specific break-even and compare it honestly against how long you expect to keep the loan. The Refinance Break-Even Calculator uses the same math and can model this for both purchases and refinances.
