Are Mortgage Points Worth It? The Break-Even Math
Quick answer
A mortgage point costs 1% of the loan amount and lowers your interest rate; whether it pays off depends on how long you keep the loan. On a $380,000, 30-year loan, paying one point ($3,800) to go from 6.75% to 6.5% lowers the payment by $62.81 a month. Dividing the cost by that saving suggests about 60 months to break even, but because the lower rate also pays the balance down faster, the real break-even is 48 months. Keep the loan longer than four years and the point comes out ahead; sell or refinance sooner and it was money lost.
Somewhere in the mortgage paperwork you'll be offered a trade: pay a little more at closing, and get a slightly lower interest rate for the life of the loan. Those upfront payments are called points, or discount points, and they're one of the few parts of a mortgage you really get to choose.
Whether they're worth it isn't a matter of opinion. It's arithmetic, and it turns almost entirely on how long you'll keep the loan. The tricky part is that the usual shortcut for doing the sum gives the wrong answer.
What a point actually buys
One point costs 1% of the loan amount, so a point on a $380,000 mortgage is $3,800. You don't have to buy whole points; lenders will quote half a point, or even an eighth. In return you get a lower rate than the same lender would give you with no points.
How much lower varies from lender to lender and from week to week, so there's no fixed exchange rate. For the examples here, assume one point buys a quarter of a percentage point, taking a 30-year rate from 6.75% down to 6.5%. Your own Loan Estimate will show the real offer, with points listed on page 2.
The shortcut, and why it's too pessimistic
At 6.75%, a $380,000 loan over 30 years costs $2,464.67 a month. At 6.5% it's $2,401.86, so the point saves $62.81 a month. The usual shortcut divides the cost by the monthly saving: $3,800 ÷ $62.81 is about 60 months, or five years.
That leaves something out. At the lower rate, a little more of every payment goes to the balance, so you owe less at any point along the way. If you sell or refinance, that smaller balance is money in your pocket too. Counting both the lower payments and the lower balance, the point pays for itself after 48 months, a full year sooner than the shortcut suggests.
| If you keep the loan for | Net result of paying the point |
|---|---|
| 3 years | $939 worse off |
| 4 years | About even |
| 5 years | $975 better off |
| 10 years | $5,732 better off |
| 30 years | $18,813 better off |
$380,000, 30-year loan, one point ($3,800) for 6.5% instead of 6.75%. Net result counts payment savings plus the lower remaining balance, less the cost of the point.
The real question: how long will you keep this loan?
Most mortgages don't run their full term. People move, and when rates fall they refinance, and either one ends the loan you paid points on. The point only pays off if the loan lasts past break-even, so the honest question isn't "will I live here for years?" but "will I keep this exact loan for years?"
If rates are high when you buy, there's a fair chance you'll refinance if they come down, which cuts the point's life short. The Consumer Financial Protection Bureau suggests asking your lender to show the total cost with and without points over three timeframes: the shortest you might keep the loan, the longest, and the most likely. That's a sensible way to see the trade-off on your own numbers.
Money spent on points is money not left in savings. $3,800 kept in an account earning 4% would grow by about $1,200 over seven years. It is a modest effect, but it pushes the true break-even a little later than the table shows.
More points, same logic
Buying two points works the same way. At $7,600 for a rate of 6.25%, the payment drops to $2,339.73, a saving of $124.95 a month. The shortcut break-even is again about five years, so a second point doesn't make the trade any quicker to pay back. It just makes the bet bigger in both directions.
Lender credits are the mirror image. You accept a slightly higher rate, and the lender pays some of your closing costs. They make sense in the opposite situation, when you expect to move or refinance fairly soon and would rather keep cash in hand now.
A word on taxes
Points paid on a mortgage to buy your main home can often be deducted in full in the year you pay them, if you itemize and meet the IRS tests. Points paid to refinance are different: they're generally deducted gradually over the life of the new loan. If you're counting on a tax benefit to help the numbers, check which rule applies to you before you decide.
Frequently Asked Questions
How much does one mortgage point cost?
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One point is 1% of the loan amount, so $1,000 for every $100,000 borrowed. Lenders also offer fractions of a point.
How much does a point lower the rate?
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It varies by lender and over time, so there is no fixed answer. Compare offers on your Loan Estimate, where points are shown on page 2, and ask each lender for quotes with and without points.
When are points not worth it?
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When you are likely to sell or refinance before the break-even point, which is often four or five years. If rates are high when you buy and you expect to refinance when they fall, points are less likely to pay off.
Are mortgage points tax-deductible?
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Points on a loan to buy your main home can often be deducted in full in the year paid, if you itemize and meet the IRS tests. Points on a refinance are generally deducted over the life of the loan.
Sources
- CFPB — How should I use lender credits and points (also called discount points)? — Explains that one point equals 1% of the loan amount, that points can be fractions, that they appear on page 2 of the Loan Estimate, how lender credits work in the opposite direction, and the suggestion to compare total costs over the shortest, longest and most likely time you will keep the loan.
- IRS Publication 936 — Home Mortgage Interest Deduction — The tax treatment of points: deductible in full in the year paid on a loan to buy your main home if the tests are met, but generally deductible only over the life of the loan when you refinance.