Are mortgage points worth it? How to calculate your break-even

Short answer: a mortgage "point" costs 1% of the loan amount and typically lowers your interest rate by about 0.25%, though the exact reduction varies by lender. Points are worth buying only if you will keep the loan past the break-even point, which is the cost of the points divided by your monthly savings. On a $400,000 loan, one point costs $4,000 and saves roughly $66 a month, for a break-even of about 60 months, or five years.

What is a mortgage discount point?

A discount point is prepaid interest: you pay the lender a fee at closing in exchange for a lower rate for the life of the loan. One point equals 1% of the loan amount, so one point on a $400,000 mortgage costs $4,000. Do not confuse these with "origination points", which are fees the lender charges for processing the loan and which do not reduce your rate. Always ask the lender to show you which is which on your Loan Estimate.

A worked example, with real numbers

Break-even is $4,000 divided by $66, which is about 60 months, or five years. If you keep the loan longer than five years you come out ahead; if you refinance or sell sooner, you lose money on the points. Over the full 30 years, the savings add up to roughly $19,800 net of the upfront cost, but only if you keep the loan that long. The rates here are illustrative, since real rate cuts depend on your lender and the market.

How to run the break-even for your own offer

1. Get two quotes from the same lender on the same day: one with no points and one with points.
2. Subtract the monthly payments to get the monthly saving.
3. Divide the cost of the points by that monthly saving. The result is the number of months to break even.
4. Compare it with how long you realistically expect to keep this loan, not the full 30 years.

Most people move or refinance well before 30 years. The average mortgage is often paid off or replaced within about 7 to 10 years. If you think you might refinance within a few years when rates fall, points are usually a poor bet.

When are points worth it?

• You plan to stay in the home for a long time, well beyond the break-even.
• You have spare cash after your down payment, closing costs and a solid emergency fund.
• Rates are unlikely to fall enough to make refinancing attractive.
• You value a lower, predictable monthly payment for budget reasons, and have confirmed that you can afford it either way.

When are points a mistake?

• The money would otherwise reduce your down payment. A larger down payment can remove private mortgage insurance and reduce the loan, often a better use of cash. See whether 20% down is always necessary.
• You might move or refinance within five years.
• It drains your cash reserves. Being house-rich and cash-poor is risky. See how many months of reserves a mortgage needs.
• The rate reduction offered per point is small compared with market norms. Ask for the exact rate with and without each point.

Other closing costs to compare

Points are only one part of closing costs, which commonly run roughly 2% to 5% of the purchase price once you add the lender's fees, appraisal, title insurance, taxes and prepaid items. You can compare lenders on their total cost, not just their rate, using the Loan Estimate form every lender must provide. For hidden ongoing costs, see the hidden costs of buying a house, and use our mortgage resilience report to check how your payment holds up if your income or rates change.

General education, not lending or financial advice. Rates, fees and rules vary by lender and change often.

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