Mortgage Points: When Paying Upfront Actually Makes Sense

What a point actually buys

One point equals 1 percent of your loan amount, paid at closing. On a $300,000 loan, one point costs $3,000. In exchange, the lender typically cuts your rate by about 0.25 percentage points, though the exact discount varies by lender and market.

Example: your quoted rate is 6.75 percent. Pay one point ($3,000) and the rate drops to 6.50 percent. Pay two points ($6,000) and it might drop to 6.25 percent. The discount per point often shrinks as you buy more, so the first point is usually the best value.

Points are prepaid interest, which also means they may be tax-deductible in the year you pay them on a purchase mortgage, subject to IRS rules. That deduction softens the upfront cost slightly if you itemize.

The breakeven math

Monthly principal and interest on $300,000 at 6.75 percent over 30 years is about $1,946. At 6.50 percent it is about $1,896. The monthly saving from one point: roughly $50.

Breakeven is simple division: $3,000 upfront divided by $50 a month equals 60 months, or 5 years. Stay in the loan longer than 5 years and the points pay for themselves, then keep paying you $50 a month. Leave earlier and you lose money.

And 'leave' includes refinancing, not just selling. If rates drop to 5.5 percent in year three and you refinance, your $3,000 bought only 36 months of savings, about $1,800, and the rest is gone. This is the risk most buyers underestimate.

When points win

You are buying your long-term home and plan to stay well past breakeven. If you keep the loan 15 years, that $3,000 point returns $50 a month for 180 months: $9,000 in savings, triple your money, with zero risk.

You have cash to spare and nowhere better to put it. Earning a guaranteed $50 a month on $3,000 is a 20 percent annual return on the upfront cost once past breakeven, far better than a savings account.

You are stretching to qualify. A lower rate means a lower monthly payment, which can help your debt-to-income ratio pass the lender's threshold. Sometimes points are the difference between approval and rejection.

Tax deductions tilt the math slightly in favor of points. If you are in the 22 percent bracket and deduct a $3,000 point, the after-tax cost is about $2,340, which shortens the breakeven to roughly 47 months. Do not let the deduction decide for you, but do include it in the calculation.

When points lose

You might move or refinance before breakeven. The median homeowner stays about 13 years, but first-time buyers move sooner, and anyone expecting rates to fall should think twice before prepaying for a rate they plan to replace.

The opportunity cost is real. That $3,000 invested at a 7 percent average return grows to about $5,900 in 10 years. Points only beat investing if you hold the loan long enough for the monthly savings to compound past that.

You are cash-strapped at closing. Draining your emergency fund to buy points leaves you exposed. Cash in hand after closing is worth more than a slightly lower payment, especially in the expensive first year of homeownership.

Jumbo loans and investment properties change the calculus too. Points on investment property are deducted over the loan term rather than upfront, weakening the tax benefit, and the per-point rate discount is often smaller on large loans. The breakeven formula still works, but verify the discount first.

The mirror image: lender credits

Points have an opposite: lender credits, sometimes called negative points. Instead of paying upfront, you accept a higher rate and the lender gives you cash toward closing costs.

Example: take 7.0 percent instead of 6.75 percent on $300,000 and receive a $3,000 credit. Your payment rises by about $50 a month, but you keep $3,000 at closing. If you sell or refinance within 5 years, you come out ahead, the exact mirror of the points breakeven.

Credits are the smart play when you are short on closing cash, expect to move within a few years, or believe rates will fall and you will refinance soon. Many buyers who should take credits never hear the option because loan officers earn more when you buy points.

Points versus a bigger down payment

Often the real choice is not points versus nothing, but points versus putting that cash toward the down payment. Adding $3,000 to your down payment on a $300,000 loan barely moves the payment, but it does reduce the loan amount and, if it gets you to 20 percent down, can eliminate private mortgage insurance.

Killing PMI usually beats buying points. PMI on a $300,000 loan can run $150 to $200 a month, dwarfing the $50 a point saves. If your cash gets you across the 20 percent equity line, that is almost always the better use.

Run both scenarios in the mortgage calculator below: one with points and the smaller down payment, one with the bigger down payment and no points. Compare total cost over your realistic timeline, not the full 30 years, and let the numbers decide.

There is also the buydown alternative: a temporary buydown, like a 2-1 buydown, lowers your rate for the first two years only and costs less upfront. If you expect a raise or a refinance soon, a temporary buydown can beat permanent points at a fraction of the cost. Ask your lender for a side-by-side loan estimate with and without points before you commit. Lenders must provide standardized estimates, so the comparison is apples to apples. If the loan officer resists showing the no-points option, that tells you everything about whose interest the points serve.

Frequently asked questions