Mortgage Points: Are They Worth It?
When you take out a mortgage, lenders often give you the option to "buy down" your interest rate by paying mortgage points upfront. It sounds appealing — but whether it's a good deal depends on how long you plan to stay in the home.
What One Point Costs and Does
One discount point = 1% of the loan amount. On a $400,000 mortgage, one point costs $4,000. In exchange, the lender typically reduces your interest rate by 0.25% (though this varies by lender and market). The rate reduction saves a fixed amount each month for the life of the loan.
Calculating the Break-Even
Break-even = upfront cost ÷ monthly savings. If one point costs $4,000 and saves $67/month, you break even after 60 months (5 years). If you sell or refinance before month 60, you've paid more upfront than you'll recover. If you stay beyond 5 years, every additional month saves you money.
When Points Make Sense
Points favor long-term owners (10+ year horizon), buyers with extra cash at closing who prefer lower monthly payments, and high-loan-balance borrowers (the same rate reduction saves more in absolute dollars on a larger loan). They tend not to favor first-time buyers who might refinance soon, or anyone in a falling-rate environment where refinancing is likely.
Points vs. Larger Down Payment
An alternative use of the same cash: a larger down payment. This reduces the loan balance permanently, which also lowers your monthly payment — and may help you avoid PMI. Compare both options using an amortization calculator before deciding which gives better long-term value.