Should You Buy Mortgage Points? A Break-Even Guide With Real Numbers

With 30-year rates in the mid 6% range this summer, more Florida borrowers are being offered the option to pay discount points for a lower rate. Sometimes that is a smart, long-term investment. Sometimes it is money you never get back. The difference comes down to one calculation and an honest guess about how long you will keep the loan.

What a discount point is

One discount point costs 1% of your loan amount and lowers your interest rate by an amount that varies by lender and market conditions. On a $400,000 loan, one point costs $4,000. Points are paid at closing and appear on your Loan Estimate and Closing Disclosure.

The reverse also exists. With lender credits, sometimes called negative points, you accept a slightly higher rate and the lender pays part of your closing costs.

The break-even calculation

Here is an example on a $400,000, 30-year fixed loan. The rates are illustrative, not a quote.

Option	Rate	Upfront cost	Principal and interest	Monthly savings	Break-even
No points	6.75%	$0	$2,594	-	-
1 point	6.50%	$4,000	$2,528	$66	About 61 months
2 points	6.25%	$8,000	$2,463	$132	About 61 months

In this example, paying points takes about five years to pay off. Keep the loan longer and you come out ahead. Sell or refinance sooner and you lose money.

The more precise view

The simple formula ignores one detail: a lower rate also pays down principal a little faster. Counting both the payment savings and the lower balance, the one-point option in this example is about $990 behind after 3 years, about $1,000 ahead after 5 years, about $3,000 ahead after 7 years and about $6,000 ahead after 10 years.

When buying points makes sense

• You expect to keep the home and the loan well past the break-even point
• You have cash left over after your down payment, closing costs and an emergency fund
• A lower payment helps you qualify, since it reduces your debt-to-income ratio
• The seller is paying closing costs and the credit can be applied to points

When to skip them

• You may move or sell within a few years
• You expect to refinance if rates drop. Paying points and then refinancing two years later is the most common way to waste them.
• The cash would be better used for a larger down payment to avoid mortgage insurance, or for reserves

Points versus a temporary buydown

A temporary buydown lowers your payment for the first year or two only. In a 2-1 buydown, the rate is 2% lower in year one and 1% lower in year two, then returns to the note rate. On the same $400,000 loan at 6.75%, that saves about $508 a month in year one and $260 a month in year two, roughly $9,200 in total, which someone has to fund upfront, often the seller or builder.

Temporary buydowns can make sense when a seller is offering concessions and you expect income to rise, or you plan to refinance if rates fall. Permanent points make more sense when you plan to keep the loan for the long haul. Either way, lenders qualify you at the full note rate for a temporary buydown.

Are points tax deductible?

Under IRS Publication 936, points paid on a loan to buy or build your main home can generally be deducted in full in the year paid if several tests are met, including that paying points is an established local practice, the amount is not excessive, the points are computed as a percentage of the loan and shown on your settlement statement, and you brought at least that much of your own money to closing. Points on a refinance or a second home are generally deducted over the life of the loan. A tax professional can confirm what applies to you.

How to compare offers fairly

1. Ask each lender for pricing at zero points, one point and with lender credits, all on the same day and with the same lock period.
2. Compare the APR, which folds points and many fees into the yearly cost of the loan.
3. Check Section A of each Loan Estimate, where points are listed as a dollar amount and a percentage.
4. Run the break-even with our discount points calculator.

Frequently Asked Questions

How much does one mortgage point cost?

One point costs 1% of the loan amount. On a $400,000 mortgage, one point is $4,000.

How much does a point lower my rate?

It varies by lender, loan type and market conditions. Many quotes show roughly a quarter of a percent per point, but you should compare actual pricing from each lender rather than relying on a rule of thumb.

How long does it take to break even on mortgage points?

Divide the cost of the points by the monthly savings. In our $400,000 example, both one and two points took about five years to break even.

Can the seller pay for my points?

Yes. Seller concessions can usually be applied to discount points, subject to the concession limits of your loan program.