| Scenario | Rate | Point cost | Monthly payment | Monthly savings vs no points | Interest paid | Total paid | Savings vs no points | Break-even month |
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What are mortgage points?
Mortgage points, also called discount points, are upfront fees you pay the lender at closing in exchange for a lower interest rate on your mortgage. One point costs 1% of the loan amount. On a $300,000 mortgage, one point costs $3,000.
In return, the lender reduces your rate by a small amount, usually around 0.25 percentage points per point, though the exact reduction depends on the lender and the current market.
The trade-off
Buying points means paying more money up front to save money each month for as long as you have the loan. The question is whether the monthly savings make up for the cost of the points, and how long that takes.
The break-even point
The break-even point is the number of months it takes for your monthly savings to add up to the cost of the points. If a point costs $3,000 and saves $50 a month, the break-even point is 60 months, or 5 years.
If you keep the loan past the break-even point, buying points was a good deal. If you sell the house or refinance before then, you paid for a discount you never got the full benefit of.
How long will you keep the loan?
This is the most important question. Most homeowners do not keep the same mortgage for 30 years. They sell, refinance, or pay off the loan early. Buying points usually only makes sense if you are confident you will stay in the loan for many years past the break-even point.
Opportunity cost
The money you spend on points is money you cannot use for anything else. Opportunity cost is what you give up by using that money one way instead of another. The same dollars could go toward a larger down payment, a home repair fund, or an investment that earns returns.
Comparing the guaranteed savings from points to the expected return on other uses of the money is part of a complete decision.
Negative points and lender credits
The opposite of buying points is taking negative points or lender credits. In that case, the lender gives you money toward closing costs in exchange for a higher interest rate. This trade can make sense if you do not have enough cash at closing or expect to refinance soon.
Tax considerations
On a primary home purchase, mortgage points are often tax-deductible in the year they are paid, if you itemize deductions. Points paid on a refinance usually have to be deducted gradually over the life of the loan. Tax rules change, so it is worth checking the current rules before counting on a deduction.
Common misconceptions
Points are not the same as origination fees. Origination fees pay the lender for processing the loan and do not lower your rate. Points specifically buy down the rate. Also, the rate reduction from points is not a fixed formula. Lenders differ, so it is worth asking for several quotes.
Key takeaway
Mortgage points are a bet that you will keep your loan long enough for the monthly savings to outweigh the upfront cost. They can be a smart move for a long-term homeowner with extra cash at closing, but a poor move for someone who is likely to move or refinance within a few years.