Quick answer
Buying mortgage points can be worthwhile when you plan to keep the loan long enough to recoup the upfront cost through lower monthly payments and when you have the liquidity to pay points without sacrificing emergency savings or higher-return opportunities.
How mortgage points affect your interest rate and APR
- Discount points: Each point is generally 1% of the loan amount (for example, one point on a $300,000 loan is $3,000). In exchange, lenders reduce your interest rate by a specified amount (often about 0.125%–0.25% per point for conforming 30-year fixed loans, though exact reductions vary by lender and market conditions).
- Origination points (or fees): These are not used to buy down the rate — they compensate the lender for processing the loan. Don’t confuse origination fees with discount points.
- APR vs. note rate: Lenders disclose an APR that includes fees and points. Buying points lowers the nominal interest rate but may raise or lower the APR depending on total closing costs; compare APRs when shopping.
Lenders must show these costs on the Closing Disclosure under the Truth in Lending Act (TILA), which makes comparing offers easier.
Sources: Consumer Financial Protection Bureau (CFPB) on mortgage points and TILA disclosures (consumerfinance.gov); IRS Publication 936 on points and tax treatment (irs.gov/publications/p936).
A clear example (real numbers you can reproduce)
Assume a 30-year fixed loan of $300,000.
- No points: rate = 4.50% → monthly principal & interest ≈ $1,519
- Pay 2 points ($6,000) to reduce the rate to 4.00% → monthly principal & interest ≈ $1,433
- Monthly savings = $1,519 − $1,433 = $86.70
- Break-even = $6,000 ÷ $86.70 ≈ 69 months ≈ 5.8 years
- Total interest saved over 30 years ≈ $31,200 (before tax)
This matches the standard break-even formula:
- Break-even months = Cost of points ÷ Monthly payment reduction
Use a mortgage calculator or the loan-payment formula to confirm precise payments for your loan size, rate, and term.
Tax treatment (important for the true cost)
- Purchase of a primary residence: Discount points are generally deductible in the year they are paid if you meet specific IRS tests (points must be computed as a percentage of principal, must be customary in your area, funds must be properly documented, the loan must be for purchase/improvement of your main home, and you must use the cash method of accounting). See IRS Publication 936 for details (irs.gov/publications/p936).
- Refinance: Points paid to refinance are generally deductible ratably over the life of the loan (amortized), not all at once. If you refinance and pay points, you may be able to deduct any remaining unamortized points from the prior loan in the year of refinance, subject to IRS rules.
Tax-deductibility lowers your effective break-even time if you itemize and qualify. However, the Tax Cuts and Jobs Act (TCJA) and changes to standard deduction levels mean fewer taxpayers itemize, so the immediate tax benefit may be limited for many.
Opportunity cost and after-tax calculation
Buying points ties up cash. Two common comparisons: keeping the cash invested or using it to pay down higher-interest debt.
Example after-tax effect: If you are in the 24% federal bracket and paid $6,000 in points that are fully deductible in year one, your net cost would be $6,000 × (1 − 0.24) = $4,560. Break-even months would fall to $4,560 ÷ $86.70 ≈ 52.6 months (~4.4 years).
Also consider state income tax: if you pay state tax, the benefit is slightly greater. Conversely, if you don’t itemize, you can’t claim the full deduction and the net cost remains the full $6,000, lengthening break-even.
Finally, consider the return you could earn investing that $6,000. If you can reliably earn more than the effective interest saving (after tax), investing may be preferable.
Rules of thumb and decision checklist
- Short stay (less than break-even): Don’t buy points. If you expect to sell or refinance within the break-even period, you likely won’t recoup the cost.
- Long stay (longer than break-even by a comfortable margin): Buying points often makes sense, particularly if you have excess savings and limited higher-return opportunities.
- Tight liquidity: Keep an emergency fund first — don’t buy points if it would leave you cash-strapped.
- Itemizing taxpayers: If you can fully deduct points this year, buying points is more attractive.
- Compare APRs and total closing costs: Lower monthly payment doesn’t automatically mean a better loan when fees vary.
Checklist to run before buying points:
- Calculate monthly payment at both rates and the exact monthly savings.
- Compute break-even months = cost of points ÷ monthly savings.
- Consider tax impact: will points be deductible now or amortized? (See IRS Pub. 936.)
- Factor in expected time in home, planned refinancing, or possible sale.
- Compare alternative uses for the cash (paying off higher-interest debt, investing, home repairs).
- Ask lenders for a breakdown: points vs origination fees vs other costs; confirm everything is on the Closing Disclosure.
Variations to know
- Temporary buydowns (e.g., 2/1 buydown): The lender or seller subsidizes a lower rate for the initial years only. These can be helpful if you expect income growth or short-term relief but verify who pays and whether the buydown funds are sustainable.
- Seller-paid points: Sellers can pay points as a concession. This keeps cash out of your pocket but can affect your purchase price offer or seller negotiations.
- FHA/VA loans: Rules differ for allowable seller concessions and how points are treated. Ask a loan officer familiar with those programs.
Pitfalls and common mistakes
- Failing to separate discount points from origination fees and other closing costs — not all fees reduce your rate.
- Miscomputing break-even or ignoring tax effects.
- Using funds that should be in an emergency reserve to buy points.
- Not comparing APRs and total long-term costs across lenders.
Negotiation and shopping tips
- Shop at least three lenders. Points and rate reductions vary widely; lenders compete by adjusting rates and fees.
- Ask for both the lowest rate with zero points and the rate with points — compare APRs and cash-to-close.
- Confirm whether the lender’s quoted rate reduction per point is fixed or market-dependent; small fluctuations in market rates change the value of points quickly.
- If you plan to sell within the break-even window, consider asking the seller to pay points or negotiating for seller concessions instead.
For help understanding rate-locks during the process, see our guide on “How Mortgage Rate Locks Protect You During Loan Processing”.
If you’re weighing refinancing later versus buying points now, compare the math with our article “Mortgage Recasting vs Refinancing” and think through how refinancing would change the amortization and potential deduction of points.
If your concern is monthly cash flow while you build equity or remove mortgage insurance, also review “Strategies to Remove Private Mortgage Insurance (PMI) Early.”
(Internal links:
- How Mortgage Rate Locks Protect You During Loan Processing: https://finhelp.io/glossary/how-mortgage-rate-locks-protect-you-during-loan-processing/
- Mortgage Recasting vs Refinancing: Which Is Right?: https://finhelp.io/glossary/mortgage-recasting-vs-refinancing-which-is-right/
- Strategies to Remove Private Mortgage Insurance (PMI) Early: https://finhelp.io/glossary/strategies-to-remove-private-mortgage-insurance-pmi-early/)
Example scenarios from practice
- Young buyers planning to stay 10+ years and with stable emergency funds often buy 1–2 points to shave a quarter- to half-point off the rate. The break-even generally fits their timeline, and the total interest savings over 30 years can be meaningful.
- Clients expecting a job change or short resale horizon almost always skip points; they prefer lower closing costs or a higher interest rate.
- A middle path many clients take: buy fewer points than maximum available (partial buy-down) to balance upfront cost and monthly relief.
Bottom line
Buying mortgage points is a tool, not a default. Run a simple break-even calculation, include tax effects, and compare the opportunity cost. If you plan to stay past the break-even horizon and can afford the upfront payment without jeopardizing other financial priorities, buying points can reduce lifetime mortgage costs and monthly payments.
Professional disclaimer
This article is for educational purposes and does not replace personalized financial, tax, or legal advice. I am a CPA and CFP® advising general best practices; for tax-deduction specifics and how rules apply to your situation, consult the IRS guidance (IRS Publication 936) and a qualified tax advisor.
Authoritative sources
- IRS Publication 936, Home Mortgage Interest: https://www.irs.gov/publications/p936
- Consumer Financial Protection Bureau, Mortgage points and how they work: https://www.consumerfinance.gov
