Should You Buy Mortgage Points? Full Breakeven Analysis

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What Mortgage Points Actually Are

When you take out a mortgage, your lender sets an interest rate based on market conditions, your credit, your down payment, and the loan type. Discount points let you buy that rate down — paying a lump sum at closing in exchange for a permanently lower rate. Each point costs exactly 1% of the loan amount. On a $350,000 mortgage, one point costs $3,500.

What you get in return: typically a 0.20%–0.25% rate reduction per point, depending on the lender and market conditions. Two points ($7,000) buys your rate down from 7.0% to 6.5% in the typical case. That sounds small, but over a 30-year mortgage, a 0.5% rate reduction on $350,000 saves about $40,000 in total interest — after recouping the $7,000 upfront cost.

The Breakeven Calculation: The Only Number That Matters

The core question isn't "how much do points save me overall?" — it's "when do I break even?" Because if you sell the house or refinance before breaking even, you lose money on the points.

The formula is simple: Cost of Points ÷ Monthly Savings = Breakeven Months.

• 2 points on $350,000 loan = $7,000 upfront cost
• Rate drops from 7.0% to 6.5% → payment drops from $2,329 to $2,212 → $117/month savings
• Breakeven: $7,000 ÷ $117 = ~60 months (5 years)

If you stay in the home (or keep the mortgage) for 10 years, you net $7,020 beyond the cost of points ($117 × 120 months − $7,000). For 30 years, you've saved over $35,000 net. The longer you hold, the more valuable points become.

Why the Breakeven Is Roughly the Same Regardless of Points

You'll notice the breakeven is approximately 60 months in all three cases. This isn't coincidence — it reflects the economics of a fixed rate reduction per point. If each point costs 1% of the loan and saves 0.25% per year on that same loan, you're paying 1% upfront to save 0.25%/12 per month = 0.0208% per month. The breakeven is always roughly 1 ÷ 0.0208% = 48 months at the minimum, adjusted for how the savings affect amortization.

This means the decision to buy 1 vs. 2 vs. 3 points is not primarily about breakeven timing — it's about how long you plan to stay. The more points you buy, the larger the total savings if you hold the loan to term.

Points vs. Larger Down Payment: The Key Tradeoff

If you have $7,000 extra cash at closing, you face a choice: buy 2 discount points, or add $7,000 to your down payment. The right answer depends on your current LTV situation:

• If you're below 20% down: Check whether $7,000 extra down payment would push you over 80% LTV and eliminate PMI. If so, the PMI elimination almost always saves more per month than 2 points — PMI on a 90% LTV loan at 0.8% can be $200+/month vs. $117/month from the points. Put the money toward your down payment first.
• If you're already at 20% down: Buying points is more likely the better use of the cash, especially if you plan to hold for 7+ years. The rate reduction compounds over time, whereas extra principal above 20% down has no PMI benefit and reduces principal that's already relatively cheap to carry.

The Opportunity Cost Question

Points are a guaranteed return: buy $7,000 of points, save $117/month for 60 months, and you're even — then you're ahead for the remaining 20+ years. Compare that to investing $7,000 at a 7% expected return: after 5 years you'd have ~$9,800, a gain of $2,800. After 10 years, ~$13,800, a gain of $6,800.

The investment wins long-term in a strong equity market, but only if you're willing to carry the higher mortgage rate. For risk-averse borrowers or those in high interest rate environments, points can be the equivalent of a guaranteed 6–8% return — harder to beat reliably in the market over the same timeframe.

When to Avoid Buying Points

Three scenarios where buying points is likely a bad decision:

1. You plan to sell within 3–5 years: If your breakeven is 60 months and you sell at year 4, you've paid $7,000 for 48 months of savings (~$5,600 in savings). You're $1,400 in the hole. Points only win when you hold past breakeven.
2. Rates are likely to drop: If you buy a home with the expectation you'll refinance in 2–3 years when rates fall, paying points at origination is wasted money — you'll reset to a new loan and the points disappear.
3. You're tight on cash for reserves: Using all available cash for points and leaving yourself with minimal emergency fund or home repair reserves is a cash flow risk. Points don't help in a financial emergency; savings do.

Tax Deductibility of Mortgage Points

Points paid on a purchase mortgage for your primary residence are generally fully deductible in the year you pay them, if you itemize deductions on your federal return. The requirements (per IRS Publication 936) are:

• The loan must be for buying, building, or substantially improving your main home
• Points must be a normal business practice in your area (which conventional discount points are)
• Points must be computed as a percentage of the principal amount of the loan
• Points must not be paid in lieu of amounts that would ordinarily be stated separately (like appraisal fees, inspection fees, title fees)

Points paid on a refinance must typically be deducted over the life of the loan — spread ratably each year. If you refinance again or sell the home, any remaining deduction can be taken in full that year.

The tax deductibility adds to the effective return on points. If you're in the 22% bracket and pay $7,000 in deductible points, your effective after-tax cost is $7,000 × (1 − 0.22) = $5,460. That reduces your actual breakeven meaningfully.

Use the Mortgage Points Calculator to model your specific scenario. To understand the full monthly payment picture including PMI, read What Is PMI and When Does It Go Away?