Mortgage discount points let you prepay interest upfront to secure a lower rate for the life of the loan. Whether they’re worth it depends entirely on how long you plan to keep the mortgage — and the math is simple once you understand the break-even calculation.
How Discount Points Work
- 1 point = 1% of the loan amount
- Typical rate reduction = 0.25% per point (varies by lender)
- Points are paid at closing and appear on your Loan Estimate
Example on a $400,000 30-year fixed mortgage at 7.0%:
| Option | Points Purchased | Points Cost | Interest Rate | Monthly Payment (P&I) |
|---|---|---|---|---|
| No points | 0 | $0 | 7.0% | $2,661 |
| 1 point | 1 | $4,000 | 6.75% | $2,594 |
| 2 points | 2 | $8,000 | 6.5% | $2,528 |
Monthly savings with 2 points vs. no points: $133/month
The Break-Even Calculation
The break-even period tells you how long it takes for the rate savings to pay back the upfront cost:
$$\text{Break-Even Months} = \frac{\text{Points Cost}}{\text{Monthly Savings}}$$
| Points Cost | Monthly Savings | Break-Even Period |
|---|---|---|
| $4,000 (1 pt) | $67/month | 60 months (5 years) |
| $8,000 (2 pts) | $133/month | 60 months (5 years) |
| $12,000 (3 pts) | $190/month | 63 months (5.25 years) |
After the break-even point, every monthly payment generates pure savings compared to the no-points scenario.
30-Year Total Interest Comparison
On a $400,000 mortgage at different rate/points combinations:
| Rate | Points Cost | Total Interest Over 30 Years | Total Outlay (Points + Interest) |
|---|---|---|---|
| 7.0% | $0 | $558,000 | $558,000 |
| 6.75% | $4,000 | $534,000 | $538,000 |
| 6.5% | $8,000 | $511,000 | $519,000 |
| 6.25% | $12,000 | $489,000 | $501,000 |
Paying 2 points saves $47,000 in total interest over 30 years — $39,000 net of the points cost.
When Buying Points Makes Sense
Buy points if:
- You plan to stay in the home for longer than the break-even period (typically 5–8 years)
- You have the cash available and don’t need it for reserves or other investments
- You’re in a higher tax bracket and can deduct the points in the purchase year
- You’re refinancing and rates are likely to remain flat (refinance break-even is typically longer)
Don’t buy points if:
- You may sell or refinance within 5 years (ARM, relocation, job change)
- You need the cash for a larger down payment to avoid PMI
- The monthly savings is less than what the lump sum could earn invested (compare to 7% S&P 500 return)
- You’re buying with an ARM (rate changes anyway after the fixed period)
Points vs. Down Payment: Which Is Better?
If you have $8,000 to allocate, compare two options:
Option A: Use $8,000 to buy 2 points (rate drops from 7.0% to 6.5%)
- Monthly savings: $133
- Break-even: 60 months
Option B: Add $8,000 to down payment on $400,000 purchase (from 20% to 22%)
- Reduces loan from $320,000 to $312,000
- Monthly savings: ~$52 (less interest on $8,000 loan reduction)
- No break-even — immediate equity
Verdict: If you’ll keep the loan 10+ years, points win. If your priority is equity and you might refinance, add to down payment. If you’re near the PMI threshold (20% down), use the cash to clear PMI first — that eliminates the PMI cost immediately.
Points and Your Loan Estimate
Discount points must be disclosed on your Loan Estimate in Section A (“Origination Charges”). Lenders may present multiple rate/point combinations — always request quotes at 0 points to establish the true baseline rate before evaluating whether to buy down.
| Loan Estimate Line Item | What It Is |
|---|---|
| Section A: Origination Charges | Includes origination points (lender fee) |
| Section A: Discount Points | Optional rate-buy-down cost |
| Interest Rate | The locked rate after points applied |
Discount points reduce your rate permanently — whether that saves money depends on how long you stay in the home. The mortgage amortization guide shows how payments change over time and helps you calculate the break-even point. If your rate is elevated because of low credit or high LTV, a larger down payment may reduce the rate more cost-effectively — see loan-to-value ratio (LTV). For the full dollar impact of a rate reduction over the loan life, see true cost of a mortgage rate difference.
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