Quick overview
Buying points (also called discount points) is a common way to trade cash at closing for a lower ongoing mortgage rate. The decision looks simple on the surface—pay now, save later—but the right move depends on precise math, your plans for the property, and tax rules. In my 15 years advising borrowers, the difference between a well-calculated points purchase and an emotional decision can mean thousands of dollars saved or wasted.
How buying points works (step-by-step)
- What a point costs: One point generally equals 1% of the loan amount. For a $300,000 mortgage, 1 point costs $3,000 paid at closing.
- What a point does: Lenders commonly quote that 1 point lowers the interest rate by about 0.25%, but the actual reduction varies by lender, loan program, and current market pricing.
- How it affects payments: Lower rate = lower monthly principal-and-interest payment for the life of the loan. Use a mortgage calculator to compare payments with and without points.
- Break-even: Divide the upfront cost of the points by the monthly payment savings to get the break-even months. If you’ll be in the loan longer than that, buying points can be worth it.
Example: You have a $300,000, 30-year fixed loan at 4.00% without points. Paying $3,000 (1 point) drops the rate to 3.75% and reduces the monthly payment from about $1,432 to $1,389 — a $43 monthly savings. Break-even = $3,000 / $43 ≈ 70 months (about 5.8 years).
When buying points makes sense
- You plan to keep the loan past the break-even period. If you expect to live in the house or keep the mortgage for a long time, points can be cost-effective. In my practice, clients who planned to stay 7–10 years frequently benefited.
- You have cash available without draining emergency savings. Using all available liquidity to buy points leaves you vulnerable to unexpected expenses.
- Interest-rate spread is meaningful. If the rate reduction per point is larger than usual, the points buy down more interest and shorten break-even.
- Tax rules favor you. In many purchase loans, discount points can be deductible in the year you pay them (see tax section below).
When not to buy points
- You expect to sell or refinance before break-even. If your planned time in the mortgage is shorter than the break-even, you’ll likely lose money.
- You need the cash for higher-return uses (debt payoff, investments, or emergency fund).
- The mortgage has prepayment penalties or terms that make the effective break-even length longer.
Financing points and seller-paid points
- Financing points: Some lenders let you finance points into the loan, meaning the fee is added to your principal. That reduces immediate cash outlay but increases the loan balance and accrues interest on the financed points — which usually extends the true break-even.
- Seller-paid points: On purchase transactions, sellers can agree to pay buyer’s points as part of concessions. That reduces your out-of-pocket cost and is often treated like a seller credit on the closing statement; it can make buying points especially attractive when available.
Tax treatment (what to know in 2025)
Tax treatment affects whether points are more attractive. When paid on a purchase of your primary residence, discount points are often deductible in the year paid if they meet IRS tests for mortgage points. For refinances, points are generally amortized and deducted over the life of the loan instead of as a single-year deduction. Always check current IRS guidance; see IRS Publication 936 for the rules and examples (IRS.gov/publications/p936). The Consumer Financial Protection Bureau has a clear explainer on mortgage points and how they impact costs (consumerfinance.gov/ask-cfpb/what-are-mortgage-points-en-1793/).
Note: Tax law changes can alter deductibility and thresholds; this is educational information, not tax advice. Consult a tax pro about your situation.
How to calculate break-even and evaluate choices (practical steps)
- Get precise rate quotes with and without points from your lender. Ask for the loan-level pricing adjustments that show how much rate is reduced per point.
- Compute monthly payments for both scenarios. Use a standard mortgage formula or an online calculator.
- Determine monthly savings: paymentnopoints − paymentwithpoints.
- Break-even months = costofpoints / monthly_savings.
- Compare break-even months to your expected holding period.
Example calculation (clear):
- Loan amount: $400,000
- Cost per point: 1% = $4,000
- Quote without points: 4.25% → payment ≈ $1,967 (principal & interest)
- Quote with 2 points: 3.75% → payment ≈ $1,855
- Monthly savings: $112
- Cost of 2 points: $8,000
- Break-even: $8,000 / $112 ≈ 71 months (about 6 years)
If you plan to be in the home 10+ years, this is likely a good trade. If you plan to sell in 3 years, it’s not.
Other factors to include in your decision
- Upfront cash vs. liquidity needs. Don’t deplete reserves.
- Alternative uses of cash. If you can pay down high-interest credit card debt or invest at a higher after-tax return, that may be better than buying points.
- Loan program specifics. FHA, VA, and USDA loans have different rules for allowable seller concessions and how points influence guarantees or insurance premiums.
- Adjustable-rate mortgages (ARMs). Buying points on an ARM generally buys down only the initial fixed period; after rate resets, you may lose value.
- Refinance timing. If refinancing is likely in the short term, points paid now may not be recouped.
Negotiation and shopping tips
- Shop multiple lenders. Price for points varies across lenders — always compare the net effect on monthly payments and total cost.
- Ask for a “no-points” and “with-points” Loan Estimate to compare clearly. Lenders must provide a Loan Estimate showing costs and payments.
- Negotiate origination fees and other closing costs separately. Sometimes a lender will reduce an origination fee instead of lowering the rate.
- Consider a “lender credit” alternative. A lender credit raises your interest rate slightly but reduces closing costs — useful when you need cash now.
Common mistakes I see in practice
- Buying points without calculating break-even or considering likely move/refinance timelines.
- Over-focusing on monthly payment without accounting for how much the point cost reduces principal-benefit or interacts with mortgage insurance and taxes.
- Financing points without re-running break-even calculations: adding the cost into the loan often cancels much of the expected benefit.
Examples and visuals
| Scenario | Loan | Rate (no points) | Points | New rate | Monthly savings | Break-even |
|---|---|---|---|---|---|---|
| Example A | $300,000 | 4.00% | 1 point ($3,000) | 3.75% | $43 | 70 months (~5.8 yrs) |
| Example B | $400,000 | 4.25% | 2 points ($8,000) | 3.75% | $112 | 71 months (~6 yrs) |
Use these calculations as templates — your lender’s exact numbers will differ.
Where to find reliable info and tools
- Consumer Financial Protection Bureau: what are mortgage points — clear Q&A and examples (consumerfinance.gov). (CFPB)
- IRS Publication 936: rules on mortgage interest and deductibility of points (irs.gov/publications/p936). (IRS)
- Mortgage calculators and amortization charts from reputable financial sites to model scenarios.
Also see related FinHelp guides:
- Mortgage Closing Costs: Common Fees and How to Save — a practical look at typical closing charges and negotiation tactics (FinHelp article: https://finhelp.io/glossary/mortgage-closing-costs-common-fees-and-how-to-save).
- When to Refinance: Timing, Break-Even, and Costs — deeper coverage of break-even math and when refinancing makes sense (FinHelp article: https://finhelp.io/glossary/when-to-refinance-timing-break-even-and-costs/).
Final checklist for closing day
- Ask the lender for the Loan Estimate and Closing Disclosure showing points explicitly.
- Confirm whether points are discount points or origination fees — they’re treated differently for taxes and accounting.
- Run the break-even analysis and compare to your expected time in the loan.
- Check whether points are seller-paid or financed and how that changes the economics.
- Talk with a tax advisor if you expect to deduct points, especially for refinance situations where deduction is amortized.
Professional disclaimer
This article is educational and does not constitute personalized financial, tax, or legal advice. Individual circumstances vary. Consult a licensed mortgage professional and a tax advisor before making decisions about buying points or changing your mortgage terms.
Sources and further reading
- IRS Publication 936, “Home Mortgage Interest Deduction” — https://www.irs.gov/publications/p936
- Consumer Financial Protection Bureau, “What are mortgage points?” — https://www.consumerfinance.gov/ask-cfpb/what-are-mortgage-points-en-1793/
- Investopedia, “Interest Rate” and mortgage-points explainers
In my practice, clear math and conservative liquidity assumptions prevent most buyer’s remorse. If you’d like, run your numbers with your loan quote and I can point out which scenario is likely the better choice.
