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When buying a home, one of the key decisions you’ll make at closing is whether to buy mortgage points, also known as discount points.
What are mortgage points? They’re an optional fee you can pay at closing to lower your loan’s interest rate. Paying for points lets you lower your mortgage’s interest rate in exchange for an upfront cost. Over time, the monthly savings can add up, but only if you stay in the home long enough to “break even.”
Understanding the break-even point for mortgage points is essential. It helps you decide whether the upfront expense is worth it and how it fits into your long-term financial goals.
The basics of mortgage points
Each mortgage point typically costs 1% of your total loan amount and can reduce your rate by about 0.25 percentage points, though the exact discount varies by lender.
If you’re taking out a $350,000 loan, one point would cost $3,500. If your lender offers to reduce your rate from 6.5% to 6.25%, you’d pay that fee upfront in exchange for smaller monthly payments over the life of the loan.
The savings can be significant, but it may only make sense if you hold the mortgage long enough to recoup the cost of the points.
Understanding the break-even point
The break-even point for mortgage points is when the total savings from your lower monthly payments equal the amount you paid upfront for the points. After you hit that milestone, every month you stay in the home represents additional savings.
You can find your break-even point using this formula:
Break-even (in months) = Cost of points ÷ Monthly savings
Let’s revisit the earlier example:
- Loan amount: $350,000
- Cost of one point: $3,500
- Monthly savings from rate reduction: $80
In this case, your break-even point would be about 44 months, or just over 3½ years. That means buying a point could make sense financially if you plan to stay in the home longer than that.
How long you’ll stay matters most
Buying mortgage points only pays off if you remain in the home long enough to surpass the break-even period.
If you expect to move, refinance, or sell the property before that point, you likely won’t recover the upfront cost. Your money may have been better spent elsewhere, such as on your down payment or savings buffer.
For long-term homeowners, however, buying points can lead to substantial lifetime savings. On a 30-year mortgage, shaving just 0.25% off your rate could save tens of thousands of dollars in interest over time.
If you’re unsure about your plans, ask your lender to prepare a side-by-side comparison showing your total costs and savings for different scenarios (with and without points).
When buying points can make sense
Consider these situations where buying points may make financial sense:
1. You plan to stay for the long term
The longer you keep the mortgage, the more you benefit from lower interest. For homeowners who plan to stay in their home for at least five to seven years, points can be a smart investment.
2. You want predictable long-term savings
Unlike an adjustable-rate mortgage (ARM), buying points locks in a lower fixed rate for the life of the loan, providing stability in your monthly payments.
3. You’re confident about your financial cushion
Since points add to your upfront costs, it’s best to purchase them only if you still have enough savings left for emergencies and moving expenses.
When points might not be worth it
It’s also worth considering when it’s not ideal to purchase discount points, such as when:
1. You expect to move or refinance soon
If you sell or refinance before the break-even period, you won’t benefit enough from the lower rate to make up for the upfront expense.
2. You’re already paying a competitive rate
In some markets, lenders may offer favorable rates without the need to buy points. It’s worth comparing multiple offers to make sure points provide meaningful value.
3. You need funds for other priorities
If your savings are tight, it may be more beneficial to put that money toward your down payment. A larger down payment can reduce your loan balance and may even help you avoid mortgage insurance if you’re using a conventional loan.
Calculating your personal break-even point
While online calculators can estimate your break-even timeline, it’s best to confirm the numbers directly with your lender. Ask for a loan estimate that includes:
- The cost per point
- The rate reduction each point provides
- Your estimated monthly savings
- The total time needed to break even
You can also experiment with additional points. Sometimes, buying half a point or 1.5 points offers a better balance between upfront cost and long-term benefit.
Beyond breaking even
Once you pass your break-even point, every month’s payment at your reduced interest rate puts more money back in your pocket. You can use those savings strategically to strengthen your financial position.
Here are a few ways to make the most of post–break-even savings:
- Build your emergency fund: Redirect your monthly savings into a high-yield account to boost financial security.
- Make extra principal payments: Use the savings to pay down your mortgage faster and build equity more quickly.
- Invest for the future: Channel the monthly difference into a retirement or investment account for compounded growth.
Reaching your break-even point is just the start. It’s when your home loan begins working for you.
Planning ahead
Buying mortgage points can be a smart way to manage your homeownership costs as long as you understand how the break-even point fits into your long-term goals.
If you’re planning to stay in your home for years to come, the savings from a lower interest rate can outweigh the upfront expense. But if flexibility or short-term affordability is more important, you may want to keep your cash on hand and skip the points altogether.
The key is balance. Always try to make a decision that supports your present budget and your future financial stability.
Disclaimer: Article content is intended for information only. It may not reflect the publisher nor employees’ views. Consult a mortgage professional before making financial decisions. Publishers or platforms may be compensated for access to third party websites.
