Should You Buy Mortgage Points?

A mathematical guide to understanding "discount points" and calculating your break-even timeline.

1. What Are Mortgage Points?

Mortgage points, also known as "discount points," are fees paid directly to the lender at closing in exchange for a reduced interest rate. This is also called "buying down the rate."

• One point costs 1% of your mortgage amount (e.g., $3,000 on a $300,000 loan).
• The Benefit: Buying one point typically lowers your interest rate by 0.25% (e.g., from 7.0% to 6.75%), though this varies by lender.

2. The Break-Even Calculation

The decision to buy points is a pure math problem. You are paying an upfront cost to save a small amount every month. The "break-even point" is the number of months it takes for your monthly savings to equal the upfront cost.

Example: You pay $4,000 upfront to save $80 per month.

• $4,000 ÷ $80 = 50 months (4.1 years).
• If you plan to stay in the home for more than 4.1 years, buying points saves you money. If you plan to sell or refinance in 3 years, you lose money.

3. How to Use Our Calculator to Decide

You can use the Compare feature on our main calculator to run this analysis yourself:

1. Enter your loan details in the main calculator (Scenario A) with the standard interest rate (e.g., 7.0%). Note the monthly payment.
2. Click the "Compare" button.
3. In the Comparison tab (Scenario B), enter the lower interest rate offered with points (e.g., 6.75%).
4. Look at the difference in "Total Monthly Payment." This is your monthly savings.
5. Divide the upfront cost of the points by this monthly savings number to find your break-even month.