When you're shopping for a mortgage, you'll encounter a decision that can save - or cost - you thousands of dollars: should you buy discount points? This upfront investment to lower your interest rate is one of the most misunderstood aspects of mortgage financing.
The Points Decision Framework
Buy points if staying 5+ years, have excess cash, and believe rates won't drop significantly
Skip points if moving within 3-4 years, prefer investing cash elsewhere, or rates may decline
Calculate your break-even: Point cost / Monthly savings = Months to recoup investment
One point on a $400,000 loan: costs $4,000, saves approximately $67-70/month
Discount Point
A form of prepaid interest on a mortgage loan. One discount point equals 1% of the loan amount and typically reduces the interest rate by 0.25 percentage points for the life of the loan.
Try the Buydown CalculatorDetermine the Point Cost
Multiply your loan amount by 1% per point. For a $400,000 loan, one point costs $4,000.
Calculate the Rate Reduction
Confirm with your lender how much each point reduces your rate. The typical reduction is 0.25%.
Find Your Monthly Savings
Compare monthly payments at both rates. At 6.5%, the payment is $2,528. At 6.25%, it's $2,463. Monthly savings equal $65.
Calculate Break-Even Period
Divide the point cost by monthly savings. $4,000 / $65 = 61.5 months (about 5.1 years).
Consider Total Interest Savings
In this example, buying one point saves approximately $19,400 in total interest over 30 years - a nearly 5x return.
Buying Discount Points - Weighing Your Options
Once purchased, the rate reduction applies for the entire loan term
On a $400K loan, one point can save $19,000+ in total interest over 30 years
Points are prepaid interest, typically deductible in the year paid for purchases
On a $400K loan, 2 points costs $8,000 - money that could go toward down payment or reserves
Selling before break-even means you paid for savings you never received
If rates fall significantly, you'll want to refinance and lose the value of purchased points
Discount Point Break-Even Periods
| Loan Amount | 1 Point Cost | Monthly Savings | Break-Even |
|---|---|---|---|
| $200,000 | $2,000 | $33 | 60 months |
| $300,000 | $3,000 | $50 | 60 months |
| $400,000 | $4,000 | $67 | 60 months |
| $500,000 | $5,000 | $83 | 60 months |
Maximizing Points Value for High Earners
If you're in a high tax bracket (32%+) and itemize deductions, the tax benefit significantly improves the return on points. A $4,000 point purchase that's fully deductible saves $1,280+ in taxes.
Use our Buydown Calculator to model different point scenarios. See break-even periods, monthly savings, and total interest saved for your specific loan amount and rate.
Key Takeaways
One point costs 1% of your loan and typically lowers the rate by 0.25%
Break-even is usually 4-7 years - buy points only if you'll stay past that point
Shop lenders for the best rate reduction per point - it varies significantly
Points are tax-deductible as prepaid interest if you itemize deductions
Don't deplete reserves to buy points - financial cushion matters more