Mortgage Points: When Buying the Rate Down Pays

Are Mortgage Points Worth Buying?

Mortgage points are worth buying when you will keep the loan comfortably past the break-even month. One discount point costs 1% of the loan amount and typically trims the rate by about 0.25 percentage points, per Freddie Mac. On a $400,000 loan at 6.75%, paying $4,000 for a 6.50% rate saves $66.12 a month and breaks even in 60.5 months. Exit the loan sooner and that $4,000 is gone.

That 60.5-month figure is also the optimistic version. Count what the $4,000 could have earned sitting in a 4.5% savings account and the real break-even drifts out to about 69 months. This guide works through both calculations to the dollar, compares zero, one, and two points side by side, and walks the scenarios where paying points quietly loses.

What One Discount Point Buys

A discount point is prepaid interest: you hand the lender cash at closing and the lender lowers your rate for the life of the loan. The CFPB defines one point as 1% of the loan amount, so one point on a $400,000 mortgage costs $4,000. Points come in fractions too. On a $100,000 loan you can pay 0.5 points ($500), 1.375 points ($1,375), or even 0.125 points ($125).

How much rate a point buys is the squishy part. Freddie Mac's homebuyer explainer pegs the typical discount near 0.25 percentage points per point, and the CFPB is blunt that the actual reduction depends on the lender, the kind of loan, and the mortgage market that day. Two lenders can quote the same 6.75% base rate and charge meaningfully different amounts to reach 6.50%. Price the identical rate drop with more than one lender before you commit.

Watch the vocabulary on your quote, too. Some lenders use "points" for any upfront fee calculated as a percentage of the loan, including origination charges that buy no rate reduction at all -- the CFPB flags this exact practice. A true discount point lowers the rate; an origination point just pays the lender. Both land at closing alongside your other closing costs, so read the line items rather than the labels.

One tax sentence, written carefully: if you itemize on Schedule A, points that meet IRS criteria can be deductible as home mortgage interest -- purchase loans may qualify in the year paid, while refinance points are generally deducted ratably over the loan's term (IRS Topic 504 has the requirements).

The Break-Even Math, Line by Line

Break-even equals the cost of the points divided by the monthly payment savings, and on the example loan it lands at 60.5 months. Here is every step, using the standard amortization formula M = P x (r/12) / (1 - (1 + r/12)^-n):

• Loan (P): $400,000, 30-year fixed, n = 360 payments
• At 6.75%: monthly rate 0.005625, payment = $2,594.39
• At 6.50% after one point costing $4,000: monthly rate 0.00541667, payment = $2,528.27
• Monthly savings: $2,594.39 - $2,528.27 = $66.12
• Break-even: $4,000 / $66.12 = 60.5 months

Just past five years. A mortgage calculator will confirm both payments, and an amortization calculator shows where each dollar of them goes month by month. So far this is the math every article prints.

Now Subtract What the $4,000 Could Have Earned

The simple division assumes your $4,000 had no better use. It did. Parked in a high-yield savings account at 4.5% APY, that lump sum compounds from day one while your $66.12 monthly savings has to catch up from zero. Run both balances forward month by month and the crossover lands at month 69, not 60.5. At the five-year mark you are still about $568 behind. Eight extra months may not flip your decision, but it should temper your confidence in it, because the margin is thinner than the brochure math implies.

A partial offset runs the other direction, and almost nobody prints it: the 6.50% loan retires principal faster. By month 60 you owe $374,443.91 versus $375,502.84 on the 6.75% loan, which is $1,058.93 of extra equity you collect whenever you sell. Count that alongside the savings drag and the full net-worth crossover arrives near month 54. The honest answer is a range: cash-in-pocket break-even around 69 months, total-wealth break-even closer to 54, the tidy 60.5 sitting between them.

Leaving the loan before break-even converts the points into a plain loss, and the timing is unforgiving:

You exit after	Savings banked	Net vs $4,000 cost	Net with 4.5% yield drag
3 years (month 36)	$2,380.32	-$1,619.68	-$2,034
5 years (month 60)	$3,967.20	-$32.80	-$568
Month 69	$4,562.28	+$562.28	+$17
10 years (month 120)	$7,934.40	+$3,934.40	+$3,729

Zero, One, or Two Points on a $400,000 Loan

Doubling the points roughly doubles the monthly savings on even pricing, and the break-even barely moves. Here is the example loan quoted three ways, assuming each point buys 0.25 percentage points of rate:

Points	Cash at closing	Rate	Monthly payment	Monthly savings	Simple break-even	Net if held all 30 years
0	$0	6.75%	$2,594.39	--	--	baseline
1	$4,000	6.50%	$2,528.27	$66.12	60.5 months	+$19,803
2	$8,000	6.25%	$2,462.87	$131.52	60.8 months	+$39,347

Lifetime interest tells the same story from the other end: $533,980 at 6.75%, $510,177 at 6.50%, $486,633 at 6.25%. With the 4.5% opportunity drag, the two-point break-even stretches to roughly 70 months.

That last column deserves suspicion. It assumes you hold one mortgage through 360 consecutive payments with no move and no refinance, which is a 30-year bet on a 30-year life. The bigger the upfront wager, the more that assumption has to carry.

Real rate sheets rarely price this evenly, either. The second point can buy more or less rate than the first, since the CFPB notes the discount depends on the lender, the loan type, and market conditions. Ask for pricing at each tier -- zero, half, one, two -- and run every pair through the mortgage points calculator instead of assuming the ratio holds.

Lender Credits: The Same Trade in Reverse

A lender credit runs the transaction backward: you accept a higher rate and the lender hands you cash toward your closing costs. Take the example loan at 7.00% instead of 6.75% in exchange for a $4,000 credit. The payment rises $66.82 a month to $2,661.21, so the credit stops being free money at about the 60-month mark. Keep the loan five years or less and you came out ahead; keep it fifteen and you repaid that $4,000 several times over.

Credits earn their keep for cash-tight buyers. When the down payment drains every account, the several thousand dollars a closing cost calculator says you still owe at signing can decide the purchase itself. A credit patches that hole without adding to the loan balance. There is a quieter argument too: an empty emergency fund costs more than a quarter point of rate the first time the furnace dies in November.

Short-timers get the mirror-image benefit. If you privately expect to sell or refinance within a few years, the credit pays you upfront for a higher rate you will not be around to keep paying. It is the one pricing decision where planning to leave early works in your favor.

When Points Backfire

Points fail one way: you pay today for a discount you do not stay long enough to collect. Three versions of that failure show up over and over.

You move sooner than planned. Nobody signs a 30-year note expecting the job transfer, the divorce, or the house that got too small. Before paying points, ask the tenure question coldly -- if there is any real chance you move or refinance within about five years, the math favors zero points, or a half point at most. The exit table above shows why: leave at month 36 and you are out $1,620 even before counting forgone interest.

Rates fall, and the points anchor you. Buying points is a wager that rates hold or climb. Suppose you paid two points ($8,000) and rates slide enough that refinancing makes sense at month 30. You banked $3,945.60 in payment savings and burned $4,054.40, and that sunk cost will whisper at you to delay a refinance the mortgage refinance calculator says is clearly worth taking. In a falling-rate stretch, every point you buy is a bet against your own future refinance.

You attack the principal. Aggressive extra payments shorten the loan, and paying off your mortgage early is just another early exit as far as the points are concerned. A rate discount earns its cost back slowly, over hundreds of payments; a payoff plan that ends the loan in year eight leaves the second half of that benefit on the table.

Buyers have not been treating any of this skeptically. Freddie Mac research on conforming 30-year fixed loans found 58.8% of purchase borrowers paid discount points in 2023, up from 31.3% in 2021 -- and the researchers titled the note "More Borrowers Pay Discount Points, But It May Not Be Worth It" after finding no significant financial benefit on average. Popularity is not proof.

Frequently Asked Questions

How much does one mortgage point cost?

One mortgage point costs 1% of the loan amount -- $4,000 on a $400,000 loan, $2,500 on a $250,000 loan. Points also come in fractions: 0.5 points on that $400,000 loan would run $2,000. In exchange, lenders typically cut the interest rate by roughly 0.25 percentage points per full point, though the exact discount varies by lender, loan type, and market conditions, so the same point can buy different amounts of rate on different days.

How do I calculate the break-even on mortgage points?

Divide the cost of the points by the monthly payment savings. Paying $4,000 for one point on a $400,000 loan, dropping the rate from 6.75% to 6.50%, saves $66.12 a month: $4,000 / $66.12 = 60.5 months to break even. For a sharper answer, count what the $4,000 could have earned elsewhere -- at a 4.5% savings yield, the true break-even stretches to about 69 months.

Are mortgage points tax deductible?

Sometimes. If you itemize on Schedule A, points that meet IRS criteria can be deductible as home mortgage interest, and points on a loan to buy, build, or improve your principal residence may qualify in the year paid. Points paid to refinance are generally deducted ratably over the loan term instead -- $4,000 of points on a 30-year refinance works out to roughly $133 of deduction per year. IRS Topic 504 lists the exact requirements.

Should I buy points or make a bigger down payment?

Cash-tight buyers usually get more from the down payment. On a $400,000 loan at 6.75%, $4,000 spent on one point saves $66.12 a month but takes 60.5 months to recover. The same $4,000 added to the down payment cuts the payment about $25.94 a month, shrinks the balance from day one, and never needs a break-even -- the benefit survives a sale or refinance at any time.

What are negative points or lender credits?

Lender credits are points in reverse: you accept a higher interest rate and the lender gives you cash toward closing costs. On a $400,000 loan, taking 7.00% instead of 6.75% with a $4,000 credit raises the payment $66.82 a month, so the credit stops being free after about 60 months. Credits favor buyers who are short on cash to close or likely to sell or refinance within roughly five years.

Find Your Break-Even Month

Every number above came from one example: a $400,000 loan, a 0.25-point rate discount per point, a 4.5% savings yield. Your loan size is different, your lender's point pricing is different, and your own best guess at how long you will keep the loan is the input that decides everything.

The mortgage points calculator below takes your loan amount, the quoted rate with and without points, and the point cost, then returns the payment change and the break-even month. Pull the numbers from a real Loan Estimate rather than an advertised rate, and test the result against the tenure you would bet money on -- because that is exactly what points are.