How Do Mortgage Points Influence Long-Term Refinance Calculations?

Buying mortgage points during a refinance trades cash today for a lower interest rate over the life of the new loan. That trade influences three linked calculations professionals use to decide if buying points makes sense: the simple break-even, tax-adjusted cost, and the net present value (NPV) of the decision. Below I explain each calculation, show worked examples, and give practical rules of thumb I use in client work.

1) The basic mechanics: cost, rate reduction, and monthly savings

  • What a point costs: one discount point typically equals 1% of the new loan amount paid at closing. Two points equals 2%, and so on.

  • What you get: lenders reduce the mortgage interest rate for each point. The size of the rate cut varies by lender and market conditions, but common ranges are 0.125%–0.5% per point on conventional mortgages.

  • Monthly savings: a lower rate reduces the monthly principal-and-interest (P&I) payment according to the standard mortgage formula:

    M = P * r / (1 – (1 + r)^-n)

    where M = monthly payment, P = loan principal, r = monthly interest rate, and n = total number of payments.

Example (illustrative):

  • Refinance loan: $300,000, 30-year term (n = 360)
  • Rate before points: 4.50% (r monthly ≈ 0.045/12)
  • Rate after buying 1 point: 4.00% (r monthly ≈ 0.04/12)

Monthly P&I at 4.50% ≈ $1,520; at 4.00% ≈ $1,432. Monthly savings ≈ $88.

Cost of 1 point = 1% × $300,000 = $3,000. Simple break-even = cost / monthly_savings = $3,000 / $88 ≈ 34 months (about 2.8 years).

That simple break-even is the centerpiece of many borrower decisions: if you expect to keep the loan longer than the break-even period, buying the point may make sense.

2) Tax treatment: how deductibility changes the math

Tax rules change the effective cost of points. For federal income tax purposes (as of 2025), points paid on the purchase of a primary residence are generally deductible in the year paid if they meet IRS conditions; points paid on a refinance generally must be deducted ratably over the life of the loan (IRS guidance) unless a portion is used to substantially improve the home (IRS). See the IRS pages on mortgage interest and points for current rules (IRS: Deducting mortgage interest and points: https://www.irs.gov/taxtopics/tc505).

What this means practically:

  • If points on a refinance are not immediately deductible, you cannot claim the full deduction in year one — the tax benefit is spread across the loan term.
  • The immediate tax deduction (if allowed) reduces your after-tax cost of buying points; the amortized deduction reduces the effective monthly cost over time.

Example (tax-adjusted break-even):

  • Same $3,000 point cost; assume you are in the 24% marginal tax bracket and the points are deductible in the year paid.
  • Effective after-tax cost ≈ $3,000 × (1 − 0.24) = $2,280.
  • New break-even = $2,280 / $88 ≈ 26 months.

If deductions must be amortized, reduce the monthly savings by the monthly tax shelter—this typically lengthens the break-even.

Note: tax treatment depends on facts and current law. Consult a tax professional for personal advice and check IRS guidance (https://www.irs.gov) before assuming deductibility.

3) Opportunity cost and alternative uses of the cash

Buying points uses closing funds that could instead pay down other debts, build an emergency fund, or be invested. Compare the after-tax return from buying points (the implied interest saved) to the expected return from alternatives.

Quick comparison method:

  • Calculate the internal ‘yield’ from buying the point: find the discount rate that equates the point cost to the stream of monthly savings (a simple IRR calculation). If that yield is higher than what you expect to earn elsewhere (after taxes and risk), the purchase may be attractive.

Example: if paying $3,000 now saves $88/month for at least 30 years, the annualized return from that decision is roughly 3–4% (depends on length and discounting). If you have better after-tax investment options that reliably return 6% real, buying the point may be inferior.

4) Net Present Value (NPV) comparison — the rigorous option

NPV answers: does paying points increase your wealth today, using a chosen discount rate? Steps:

  1. Calculate the cash outflow at closing (points paid).
  2. Calculate the future monthly savings for each period until you sell or refinance again.
  3. Discount those savings back to present value using an appropriate discount rate (after-tax opportunity cost).
  4. If PV(savings) − points_paid > 0, buying points has positive NPV and is financially beneficial under those assumptions.

This approach forces you to be explicit about how long you plan to keep the loan and the discount rate (risk/return alternative).

5) Amortization and how early refinance or sale changes the outcome

Mortgage amortization matters: early in a 30-year schedule you pay mostly interest; lowering the rate saves a larger share of early interest. If you expect to sell or refinance again within a few years, your break-even horizon is the key metric. If you expect to keep the loan long-term, NPV and IRR approaches give a fuller picture.

Also remember: when you refinance again, any points you previously amortized may produce a remaining tax benefit; track the remaining amortizable deduction if you plan future refinances.

6) Other practical considerations and traps I see

  • Compare APR, not just nominal rate. APR incorporates points and fees into a single rate, which helps when comparing offers (though APR has limitations for borrower-specific decisions).
  • Don’t ignore other closing costs. Points are one part of the refinance cost; always add total closing costs to the analysis.
  • Shop lenders. Some lenders price rates differently; what one lender calls 1 point might be embedded differently at another.
  • Consider liquidity and reserves. Using all available cash to buy points may leave you undercapitalized for emergencies.

For help comparing multiple offers while protecting your credit, see our guide: “How to Shop Multiple Refinance Offers Without Hurting Your Credit” (FinHelp).
For a deeper read on rate-buy options during refinance, read: “How Interest Rate Buys (Points) Work During a Refinance” (FinHelp).
For how changed terms affect amortization, see: “How Refinanced Loan Terms Affect Amortization Speed” (FinHelp).

Relevant internal links:

7) Example scenarios and quick rules of thumb

  • Short-term owner (<3 years): usually skip points unless the point cost is very small or you get a large rate cut.
  • Medium-term owner (3–7 years): calculate break-even and NPV; points can work if break-even is well within your horizon and you have safe liquidity.
  • Long-term owner (>7 years): points often pay off, especially if you can deduct them or if they buy a meaningful rate reduction.

Rule-of-thumb: if break-even is less than the time you expect to keep the loan and you don’t sacrifice emergency reserves, points are worth considering. Use NPV when choices are close.

8) Tax and compliance reminders

  • Discuss tax treatment with a CPA. IRS rules on points and deductibility have tests and exceptions; current guidance is available at the IRS website (https://www.irs.gov).
  • For consumer-facing explanations of how points and fees work, consult the Consumer Financial Protection Bureau resources (https://www.consumerfinance.gov).

Professional disclaimer

This article is educational and does not constitute personalized legal, tax, or financial advice. I have 15 years of lending experience and use these methods when advising clients; however, individual results will vary. Consult a licensed financial advisor and a tax professional before changing your mortgage strategy.

Authoritative sources

  • IRS — Tax topics and publications on mortgage interest and points: https://www.irs.gov (see Topic 505 and related publications).
  • Consumer Financial Protection Bureau — Consumer guides to mortgages, points, and closing costs: https://www.consumerfinance.gov.