How Mortgage Points Work
A mortgage discount point is essentially prepaid interest. You pay money upfront at closing, and in exchange, the lender gives you a lower interest rate for the life of the loan. One point costs 1% of the loan amount. On a $400,000 loan, one point is $4,000.
The standard rate reduction is 0.25% per point, but this varies by lender and market conditions. Some lenders offer larger reductions when rates are high; others offer smaller reductions. Always ask for the exact rate sheet before deciding.
The math is simple: if one point on a $400,000 loan costs $4,000 and saves you $67/month, you'll break even in about 60 months (5 years). After that, every month of savings is pure profit. If you plan to stay 10 years, you'd save approximately $4,000 beyond break-even. If you plan to move in 3 years, you'd lose money on the deal.
When Buying Points Makes Sense
You're staying long-term.The longer you keep the loan, the more value you extract from the lower rate. A good rule of thumb: if you'll stay at least 1.5x the break-even period, points are probably worth it.
You have extra cash at closing.Points only make sense if you have the cash available without depleting your emergency fund or down payment. Don't reduce your down payment below 20% to buy points. The PMI cost would wipe out your savings.
You're in a higher tax bracket. Since points are tax-deductible for primary residences, the effective cost is lower for higher earners. In the 32% bracket, a $4,000 point effectively costs $2,720 after the deduction.
When NOT to buy points:If you might refinance within a few years (rates could drop), if you're unsure about staying in the home, or if the cash would be better used for a larger down payment to avoid PMI.
Points vs. Larger Down Payment
If you have extra cash at closing, you have a choice: buy points to lower your rate, or put the money toward a larger down payment. The better option depends on your specific numbers.
A larger down payment reduces your loan balance, which lowers your monthly payment and may eliminate PMI. Points reduce your rate, which also lowers your monthly payment. In general, if you're close to the 20% down threshold, getting to 20% to eliminate PMI is almost always the better move. PMI typically costs $100–$300/month on a standard loan, which is often more than the savings from buying 1–2 points.
If you already have 20% down, the decision is purely about comparing the return on investment of points (guaranteed rate reduction) versus other uses for that cash (emergency fund, investments, home improvements).