What Are Mortgage Points?
A mortgage point — sometimes called a discount point — is prepaid interest. You pay the lender a lump sum at closing in exchange for a reduced interest rate on your loan. The rate reduction is permanent; it applies for the life of the loan.
- 1 point = 1% of the loan amount. On a $500,000 loan, 1 point costs $5,000. On a $350,000 loan, it costs $3,500.
- Each point typically lowers your rate by approximately 0.25%, though this varies significantly by lender and by market conditions. Sometimes the reduction is 0.125%; sometimes it's 0.375%. Always ask for the exact rate-to-cost schedule from your lender.
- Points are paid at closing — they're added to your cash-to-close alongside the down payment, appraisal fee, title insurance, and other closing costs. They don't come out of your loan balance.
You can also pay fractional points — 0.5 points, 1.5 points, whatever the lender's pricing grid allows. Some lenders will also offer negative points, where they pay you a credit toward closing costs in exchange for a higher rate. That's the opposite of buying down your rate.
The Break-Even Formula
The break-even calculation is straightforward. It answers one question: how many months does it take for the monthly savings to equal the upfront cost?
Break-Even Months = Upfront Point Cost ÷ Monthly Payment Savings
If you plan to own the home past that month, buying the point pays off. If you sell or refinance before then, you've lost money on the transaction.
A real example with the exact math
Let's use a $450,000 loan on a 30-year fixed rate.
Scenario: 1 Point on a $450,000 Loan
In this scenario, if you stay in the home past month 59 — just under five years — buying the point was the right call. Every month after that, you're ahead by $76. Over a 30-year mortgage, buying that one point saves you just over $22,800 in total interest paid, at a cost of $4,500 upfront. The math works clearly if you're a long-term owner.
If you sell at year 3, you've paid $4,500 upfront and recovered only $2,736 in savings — a net loss of $1,764 on the point purchase.
When Buying Points IS Worth It
There's no universal answer, but these situations generally point toward buying points:
- You plan to stay 7+ years — or you're buying a forever home and have no realistic expectation of selling. The longer your horizon, the more the math tilts in favor of buying down.
- You have cash reserves after the purchase. This is important. Buying points should never drain your savings account. If buying 1 point means you'll have nothing left for a plumbing emergency in month two, don't do it.
- The rate reduction is meaningful. If 1 point gets you 0.375% off your rate, that's worth running the math carefully. If 1 point gets you 0.125%, it's probably not worth it — the break-even period stretches to 15+ years.
- You're in a higher-rate environment and want certainty. When rates are elevated and you expect to hold the property long-term, locking a lower rate permanently insulates you from the monthly payment uncertainty. Even if rates fall and you refinance later, you're not worse off — the break-even just resets.
When Buying Points Is NOT Worth It
Points are frequently presented by lenders in a way that makes them sound like a no-brainer. They're not always that. Here's when to skip them:
- You might sell or refinance within 3–5 years. The Arizona market moves, life changes, jobs relocate. If there's meaningful uncertainty about how long you'll stay, your break-even math needs a realistic ownership horizon — not an optimistic one.
- Cash is tight. Every dollar spent on points is a dollar not in your emergency fund, not earning interest in a savings account, and not available for home repairs. A $4,500 point purchase might save you $76/month, but that $4,500 sitting in a high-yield savings account earns you something too.
- You're a real estate investor. If you're buying a rental property with a DSCR loan, the opportunity cost of deploying that capital elsewhere — into another down payment, a renovation, or a different investment — is often higher than the rate savings. Investors tend to think in terms of cash-on-cash return, and tying up capital in points rarely wins that comparison.
- The rate spread per point is thin. If your lender's pricing grid gives you less than 0.20% per point, the break-even math stretches out significantly. Always ask what you get per point before assuming the standard 0.25%.
The Tax Angle
Points paid on a home purchase are generally fully deductible in the year you pay them, under IRS guidelines, if the loan is secured by your primary residence and the points don't exceed what's normal in your area. This changes the break-even math.
If you buy a point and deduct $4,500 in the tax year you close, the after-tax cost of the point is lower than $4,500. At a 22% marginal tax rate, your effective cost drops to roughly $3,510 — and your break-even shortens from 59 months to around 46 months.
Points paid on a refinance are different. They must be deducted over the life of the loan — so on a 30-year refinance, you deduct 1/360th of the point cost each month. Less impactful in year 1.
Consult your CPA before making assumptions about deductibility. The rules have nuances, and your situation may differ from the general case. But if the deduction applies, factor it into your analysis.
A Better Question to Ask Your Lender
Most buyers ask lenders, "Should I buy points?" That's the wrong starting question, because the lender doesn't know your plans. The better approach is to ask for information and then decide yourself.
Here's what to request:
- "What's my rate and payment with zero points?"
- "What does it cost to get to a rate of X% — exactly how many points and exactly how many dollars?"
- "What's the rate for 0.5 points? 1 point? 2 points?" (The rate improvement often isn't linear — the first half-point sometimes buys more than the second half.)
Once you have those numbers, the break-even calculation is simple arithmetic. It takes five minutes with a calculator, and it tells you definitively whether the purchase makes sense for your situation. Don't let a lender frame this decision for you — run the numbers yourself.
I walk through this on every pre-approval call I do. We pull up the rate sheet together, compare the scenarios side by side, and you make the decision based on actual numbers. If it makes sense for your situation, great. If it doesn't, I'll tell you that directly.
On your pre-approval call, Logan will run this exact calculation for your loan — so you're deciding with real numbers from a real rate sheet, not guessing based on general advice. Get started here or call (480) 803-7763.
