Are Mortgage Points Worth It?

A mortgage point — also called a discount point — is an upfront fee of 1% of the loan amount, paid at closing to permanently reduce your interest rate. In exchange, the rate typically drops about 0.25% per point, though the exact discount varies by lender and market. The question is never "are points good?" It is always "will I stay in this loan long enough to earn the money back?" Here is the math, a worked example, and when the answer is yes or no.

How points actually work

Buying points is prepaying interest. You pay cash now — 1% of the loan per point — and in return the lender lowers your rate for the entire life of the loan. It is the mirror image of a "lender credit," where you accept a higher rate in exchange for the lender paying your closing costs.

One point always equals 1% of the loan amount. On a $400,000 loan, one point is $4,000. Two points is $8,000. The rate discount per point is not fixed — it floats with the market — but a useful planning number is roughly 0.25% per point.

The math: a worked example

Take a $400,000, 30-year loan at 6.5%. You are offered the option to buy one point for $4,000 to drop the rate to 6.25%:

	No points	One point
Rate	6.5%	6.25%
Upfront cost	$0	$4,000
Monthly P&I	$2,528	$2,462
Monthly savings	—	~$66

Divide the cost by the savings: $4,000 ÷ $66 = about 61 months. That is your break-even point — just over 5 years. If you keep the loan longer than that, every month afterward is pure profit; you will have saved far more than the $4,000 you spent.

Over the full 30 years, the point saves roughly $23,700 in interest on this loan. Spend $4,000 once, save $23,700 — but only if you actually stay in the loan.

When points pay off

Points win in these situations:

• You will stay long. If you expect to be in this home and this loan for 7 to 10+ years, the upfront cost returns many times over. The break-even is a rounding error against a 30-year horizon.
• You have extra cash at closing. If you have the funds and they are not needed elsewhere, buying down the rate is a guaranteed, tax-advantaged return — roughly equivalent to earning your mortgage rate on that money.
• You are buying at a high-rate moment. When rates are elevated, a point can meaningfully reduce a painful monthly payment, and you may be able to deduct points on your taxes.

When to skip points

Points are a bad deal in these situations:

• You might sell or refinance soon. If you move or refinance before the break-even point, you lose money — you paid for a rate discount you never got to use. This is the #1 mistake buyers make.
• The cash is needed elsewhere. Points should never come out of your emergency fund or a down payment that could otherwise reach 20% and remove PMI.
• You expect rates to fall. If you think you will refinance into a lower rate in a year or two, buying points now is paying to improve a rate you are about to replace anyway.

The bigger question: rate, or no PMI?

Often buyers face a choice between buying points and putting more down. In most cases, more down payment beats points. Reaching 20% down removes PMI — a $150 to $400 monthly saving that points cannot match — and reduces the loan balance at the same time. Only after PMI is off the table should points enter the conversation.

Points vs. lender credits: the two directions

Points buy your rate down; lender credits let the lender pay your closing costs in exchange for a higher rate. The choice depends on your cash position and time horizon:

• Cash-rich, staying long: buy points, lower the rate, profit over decades.
• Cash-poor, staying short: take a lender credit, keep cash in your pocket, accept a slightly higher rate.

Neither is "cheaper" in absolute terms — each moves money between the closing table and the monthly payment. Your time horizon decides which direction is right.

Frequently asked questions

How much does one point reduce the rate?

Roughly 0.25%, though it varies by lender and market. Ask for the exact rate with and without points and run the numbers.

Are mortgage points tax deductible?

Often yes — points paid on a primary residence can be deductible as mortgage interest, but the rules depend on your situation. Confirm with a tax professional.

Is it better to buy points or put more down?

Usually more down payment, if it gets you to 20% equity and removes PMI. Once PMI is gone, compare a point against the return of keeping the cash.

Can I buy points on a refinance?

Yes, the same math applies — buy points only if you will stay in the new loan past the break-even point.

Compare rates with and without points on the HomeMath mortgage calculator, and watch how the break-even shifts as the rate changes.