Are Mortgage Points Worth It? A Break-Even Analysis
Mortgage points (also called discount points) let you pay cash upfront to permanently lower your interest rate. One point equals 1% of the loan amount and typically lowers your rate by 0.25%. Like refinancing, buying points only makes sense if you stay long enough to recoup the upfront cost — the break-even point is usually 4–8 years.
What Are Mortgage Points?
A mortgage point is a fee paid directly to the lender at closing in exchange for a reduced interest rate — a practice called "buying down the rate." Points are quoted as a percentage of the loan amount:
- 1 point on a $400,000 loan = $4,000
- 0.5 points = $2,000
- 2 points = $8,000
Each point typically reduces the rate by approximately 0.25%, though this varies by lender, loan type, and market conditions. Always ask your lender to show you the exact rate/cost schedule — sometimes called the "rate sheet" — before deciding.
The Break-Even Calculation
The logic mirrors refinancing: you spend money now to save money every month. The break-even point tells you how long it takes for monthly savings to recover the upfront cost.
Example: $400,000 loan, base rate 7.0%
| Points Purchased | Cost | New Rate | Monthly P&I | Monthly Savings | Break-Even |
|---|---|---|---|---|---|
| 0 points | $0 | 7.000% | $2,661 | — | — |
| 1 point | $4,000 | 6.750% | $2,594 | $67 | 60 months (5 years) |
| 2 points | $8,000 | 6.500% | $2,528 | $133 | 60 months (5 years) |
In this example, both 1 and 2 points result in roughly the same 5-year break-even. If you plan to stay in the home more than 5 years, buying points makes financial sense. If you expect to move or refinance within 3–4 years, skip the points.
Compare Your Rate With and Without Points
See how buying down your rate changes your monthly payment and total cost
When Points Make Sense
You plan a long stay. The longer you keep the loan, the more monthly savings accumulate. A 10-year stay with a 5-year break-even yields 5 full years of savings — $67 × 60 months = $4,020 in net gain on a 1-point purchase.
You have the cash available. Points should come from savings, not from reducing your down payment or emergency fund. Weakening your financial position to buy points can create more risk than the rate discount is worth.
Rates are favorable and you don't expect to refinance soon. If you're buying at a rate you expect to hold for the full term, the long compounding of monthly savings makes points attractive.
When Points Don't Make Sense
You're likely to sell or refinance before break-even. Job changes, life events, or an improving rate environment could trigger a move or refi well before you recoup the cost.
You need liquidity. Cash spent on points at closing is cash that cannot cover repairs, moving costs, or unexpected expenses in the early homeownership months.
The lender's rate reduction per point is small. If a lender only drops your rate by 0.125% per point instead of 0.25%, the break-even stretches to 8–10 years. Compare carefully before committing.
Model a Future Refinance Scenario
If you buy points now but plan to refinance, see when each strategy comes out ahead
Key Takeaways
- One point = 1% of loan amount, typically reduces rate by ~0.25%.
- On a $400,000 loan at 7%, one point ($4,000) saves ~$67/month with a ~5-year break-even.
- Points make financial sense only if you hold the loan past the break-even point.
- Points are generally tax-deductible in the year paid for a purchase mortgage.
How much does one mortgage point reduce my interest rate?▾
The rate reduction per point varies by lender and market conditions, but a common rule of thumb is 0.25% per point. On a $400,000 loan, one point costs $4,000 and might reduce your rate from 7.0% to 6.75%. The actual reduction can be higher (0.375%) or lower (0.125%) depending on the lender's pricing model and current rate environment. Always ask your lender for the exact rate/cost tradeoff for your specific loan.
Are mortgage points tax deductible?▾
Yes, in most cases. Points paid on a mortgage to purchase or improve your primary residence are generally fully deductible in the year paid, as long as the loan is secured by your home and the points are a standard practice in your area. Points paid on a refinance must typically be deducted over the life of the loan rather than in a single year. See IRS Publication 936 for details, and consult a tax professional for your specific situation.