“Points” is one of the most misunderstood concepts in mortgage lending. Here’s what they are, how they work, and when you should buy them.
What Are Mortgage Points?
One mortgage point = 1% of the loan amount, paid at closing in exchange for a lower interest rate.
On a $400,000 loan, one point costs $4,000. In return, your lender might reduce your rate from 7.0% to 6.75%.
There are two types:
- Discount points: The kind discussed here — you prepay interest to get a lower rate
- Origination points: Lender fees for processing your loan (different from discount points)
The Break-Even Calculation
Buying points only makes sense if you’ll stay in the loan long enough to recoup the upfront cost.
Example:
- Loan: $400,000
- One point cost: $4,000
- Rate reduction: 0.25% (7.0% → 6.75%)
- Monthly payment savings: ~$67
- Break-even: $4,000 ÷ $67 = 60 months (5 years)
If you’ll stay in the loan more than 5 years: buying the point makes sense. If you’ll refinance or sell within 5 years: don’t buy points.
When Points Are Worth It
Points make sense when:
- You plan to stay in the home 5+ years
- You have excess cash at closing (emergency fund is intact)
- Rates are relatively high (the rate reduction is worth more when rates are high)
- You’re in a high tax bracket (mortgage interest, including prepaid interest from points, may be deductible)
When to Skip Points
- You’re close to maxing out your cash reserves
- You might refinance within a few years
- You’re buying a starter home you’ll outgrow
- The break-even is more than 5–6 years
We analyze your specific situation and show you the exact break-even timeline so you can make an informed decision.