With mortgage rates elevated, more buyers are considering purchasing discount points to lower their interest rate. But the math does not always work in your favor.
What Are Mortgage Points?
One discount point costs 1% of your loan amount and typically reduces your rate by 0.25%. On a $400,000 loan, one point costs $4,000 and would lower your rate from 6.2% to 5.95%.
The Break-Even Calculation
That $4,000 investment saves roughly $65/month. You would need to stay in the home for 62 months (about 5 years) to break even. After that, you save money every month.
When Points Make Sense
- You plan to stay in the home 7+ years
- You have extra cash beyond your down payment
- The seller offers to pay for points as a concession
- You want the tax deduction (points are deductible)
When to Skip Points
If you might move or refinance within 5 years, the upfront cost will not be recovered. Instead, consider using that money for a larger down payment to eliminate PMI.
