Discount points break-even

Discount points are the one part of a mortgage quote that is openly a trade: cash today in exchange for a lower rate for as long as you keep the loan. Whether that trade is good depends almost entirely on a number no lender can tell you, how long you will actually hold the mortgage.

What a point is, precisely

One discount point costs 1% of the loan amount and is paid at closing. On a $360,000 loan that is $3,600. In return the lender reduces your interest rate, commonly by around 0.25 percentage points per point, though the figure is set by the lender and the market and can be anywhere from 0.125% to 0.5%.

Points are not the same as origination fees, even though both appear on the same page of a Loan Estimate and both are quoted in percentage terms. An origination fee buys you nothing but the loan; a discount point buys a permanently lower rate. If a lender describes a fee as points but the rate does not move, it is not a discount point.

Why the simple break-even understates the case

Dividing cost by monthly saving is the standard method and it is deliberately conservative, because it ignores something real: the lower-rate loan is also paying down principal faster from month one. At any point in the loan's life you owe less on the discounted loan than you would have on the undiscounted one.

The calculator above therefore reports two figures. The headline break-even uses the simple method. The net position after your expected holding period compares total interest paid plus the points against the balance you still owe, which credits you for the faster principal reduction. On a five-to-seven year hold the honest comparison usually turns positive noticeably earlier than the simple break-even suggests.

The number that decides it

Read that table alongside one fact about American mortgages: the median time a homeowner keeps a given loan is far shorter than the thirty-year term, because moves and refinances both end it early. A break-even beyond about seven years is a bet that nothing changes for the better part of a decade. Below three years, points are close to free money.

When points are the wrong use of the cash

• When it takes you below 20% down. Paying points instead of reaching 20% equity can trigger mortgage insurance that costs more than the rate saving.
• When it empties your reserves. Closing with no cash buffer against a roof, a boiler or a job loss is a worse risk than a slightly higher rate.
• When you have higher-rate debt. Buying down a 6.75% mortgage while carrying a 24% card balance is spending money at the wrong end of your own balance sheet.
• When the seller is paying. Seller concessions and lender credits can often be directed at a temporary or permanent buydown. That is someone else's cash, and the break-even question does not apply.
• When you plan to move within three years. Almost no realistic rate reduction pays back that fast.

Points, buydowns and negative points

A permanent buydown is what this calculator models: pay once, keep the rate for the life of the loan. A temporary buydown, often marketed as 2-1 or 3-2-1. Reduces the rate only for the first two or three years and then reverts. It lowers your early payments but does nothing for lifetime interest, and you must still qualify at the full rate.

The trade also runs backwards. Negative points, or lender credits, mean accepting a higher rate in exchange for the lender covering some of your closing costs. That is the right move on the same logic reversed: if you expect to hold the loan only briefly, taking the credit and the higher rate is often cheaper than paying costs you will never recover.

One tax note, and it is genuinely a note rather than advice: discount points on a mortgage for your main home are often deductible in the year paid, subject to conditions that depend on your filing situation. The calculator ignores tax entirely, so any deduction you qualify for shortens the real break-even. Confirm it with someone who can see your return.