Should You Buy Mortgage Points? Full Breakeven Analysis

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What Mortgage Points Actually Are

When you take out a mortgage, your lender sets an interest rate based on market conditions, your credit, your down payment, and the loan type. Discount points let you buy that rate down — paying a lump sum at closing in exchange for a permanently lower rate. Each point costs exactly 1% of the loan amount. On a $350,000 mortgage, one point costs $3,500.

What you get in return: typically a 0.20%–0.30% rate reduction per point — most often about 0.25% — depending on the lender, loan program and market conditions. Two points ($7,000) buys your rate down from 7.0% to 6.5% in the typical case. That sounds small, but kept for the full 30 years, a 0.5% rate reduction on $350,000 saves about $42,000 in payments — roughly $35,000 net after recouping the $7,000 upfront cost.

Don't confuse discount points with origination points. Origination points are a lender fee for processing the loan and do nothing to your rate. On the Loan Estimate, both appear in Section A (Origination Charges), where discount points are shown as a separate line described as a percentage of the loan amount — check that anything labeled "points" actually buys a lower rate.

The Breakeven Calculation: The Only Number That Matters

The core question isn't "how much do points save me overall?" — it's "when do I break even?" Because if you sell the house or refinance before breaking even, you lose money on the points.

The formula is simple: Cost of Points ÷ Monthly Savings = Breakeven Months.

• 2 points on $350,000 loan = $7,000 upfront cost
• Rate drops from 7.0% to 6.5% → payment drops from $2,329 to $2,212 → $117/month savings
• Breakeven: $7,000 ÷ $117 = ~60 months (5 years)

If you stay in the home (or keep the mortgage) for 10 years, you net $7,020 beyond the cost of points ($117 × 120 months − $7,000). For 30 years, you've saved over $35,000 net. The longer you hold, the more valuable points become.

Why the Breakeven Is Roughly the Same Regardless of Points

You'll notice the breakeven is approximately 60 months in all three cases. This isn't coincidence: each point costs the same 1% of the loan and buys the same 0.25% of rate, so the cost and the savings scale together.

The payment-based breakeven actually overstates the wait slightly. A lower rate also shifts more of each payment to principal, so your loan balance falls faster. On the 2-point example, counting that extra equity, you are truly even after about 48 months rather than 60 — which matches the shortcut of 1% upfront ÷ 0.25%-a-year interest savings = 4 years. Use the 60-month payment figure as a conservative rule of thumb.

This means the decision to buy 1 vs. 2 vs. 3 points is not primarily about breakeven timing — it's about how long you plan to stay. The more points you buy, the larger the total savings if you hold the loan to term.

Points vs. Larger Down Payment: The Key Tradeoff

If you have $7,000 extra cash at closing, you face a choice: buy 2 discount points, or add $7,000 to your down payment. On their own, the two aren't close: the points cut the payment by $117 a month, while borrowing $7,000 less at 7% cuts it by only about $47. What changes the answer is PMI:

• If you're below 20% down: Check whether $7,000 extra down payment would push you over 80% LTV and eliminate PMI. If so, the PMI elimination almost always saves more per month than 2 points — PMI on a 90% LTV loan at 0.8% can be $200+/month vs. $117/month from the points. Put the money toward your down payment first.
• If you're already at 20% down: Buying points is more likely the better use of the cash, especially if you plan to hold for 7+ years. The rate reduction compounds over time, whereas extra principal above 20% down has no PMI benefit and reduces principal that's already relatively cheap to carry.

The Opportunity Cost Question

Points are a guaranteed return — as long as you keep the loan. Invest the same $7,000 at a 7% expected return instead and you'd have about $9,800 after 5 years and $13,800 after 10: a gain of $2,800 and $6,800, with market risk.

The 2 points, by contrast, return $117 a month. Kept for 10 years, that works out to an annualized return of roughly 18% (counting the slightly lower balance when you sell or refinance); kept 7 years, about 15%. That is hard to match in the market — but the return turns negative if you move or refinance within about four years, so the real question is how confident you are about the holding period.

When to Avoid Buying Points

Three scenarios where buying points is likely a bad decision:

1. You plan to sell within 3–5 years: If your breakeven is 60 months and you sell at year 4, you've paid $7,000 for 48 months of savings (~$5,600 in savings). On payments alone you're $1,400 in the hole; even counting the faster principal paydown you only just break even — four years of tying up $7,000 for no gain. Points only win when you hold well past breakeven.
2. Rates are likely to drop: Refinancing ends the old loan and whatever you prepaid on it. Buy 2 points and refinance after 3 years, and you've recovered only about $4,200 of monthly savings ($117 × 36) on a $7,000 outlay — roughly $2,800 short, or about $1,700 even after counting the faster principal paydown. If there's a realistic chance you'll refinance within a few years because rates fall, buy fewer points or none.
3. You're tight on cash for reserves: Using all available cash for points and leaving yourself with minimal emergency fund or home repair reserves is a cash flow risk. Points don't help in a financial emergency; savings do.

How to Compare Points Across Lenders

Every lender offers a menu of rate-and-point combinations, and the menus differ. To compare them fairly:

1. Request Loan Estimates from at least three lenders on the same day, for the same loan amount and lock period. Mortgage inquiries within a short window (14–45 days, depending on the scoring model) count as a single inquiry for your credit score.
2. Ask each for quotes at 0, 1 and 2 points so you can see the price of each 0.25% of rate.
3. Compare the APR, which folds points and other lender fees into an annualized cost — but remember APR assumes you keep the loan for its full term, which flatters points if you'll move sooner.
4. Run the breakeven for each option and choose the one that fits your expected time in the loan, not simply the lowest rate.

Tax Deductibility of Mortgage Points

Points paid on a purchase mortgage for your primary residence are generally fully deductible in the year you pay them, if you itemize deductions on your federal return. The requirements (per IRS Publication 936) are:

• The loan must be for buying, building, or substantially improving your main home
• Points must be a normal business practice in your area (which conventional discount points are)
• Points must be computed as a percentage of the principal amount of the loan
• Points must not be paid in lieu of amounts that would ordinarily be stated separately (like appraisal fees, inspection fees, title fees)
• You must provide at least as much cash at or before closing as the points — the points can't be paid with funds borrowed from the lender or mortgage broker

Points paid on a refinance must typically be deducted over the life of the loan — spread ratably each year. If you refinance again or sell the home, any remaining deduction can be taken in full that year.

The tax deductibility adds to the effective return on points. If you're in the 22% bracket and pay $7,000 in deductible points, your effective after-tax cost is $7,000 × (1 − 0.22) = $5,460. That cuts the 2-point breakeven from about 60 months to about 47 ($5,460 ÷ $117). The benefit only applies if you itemize — and with today's high standard deduction, many homeowners don't.

Quick Decision Framework

Buy points if: you expect to keep the loan well past the breakeven month, a refinance in the next several years is unlikely, you're already at 20% down (no PMI to eliminate), and you'll still have a healthy emergency fund after closing.

Skip points if: you may sell or refinance before breaking even, the same cash would get you to 20% down and remove PMI, you'd be draining your reserves, or you're comparing lenders and a competitor offers a similar rate with fewer points.

Use the Mortgage Points Calculator to model your specific scenario. To understand the full monthly payment picture including PMI, read What Is PMI and When Does It Go Away?