Mortgage Points: The Break-Even Is Real, and Three Things Reset It to Zero
Buying points is a bet that you will still hold this exact loan in five years. Refinancing, selling or prepaying all settle that bet against you, which is why the break-even month matters more than the monthly saving.
- Published
- Read
- 11 min
- 61 mo
- Simple break-even on one point
- 52 mo
- True break-even, equity included
- 3
- Events that void the bet entirely
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A discount point is 1% of your loan amount, paid at closing, in exchange for a permanently lower rate. Typically 0.25% of rate per point, though the exchange rate varies by lender and by day. On a $400,000 loan that is $4,000 spent to save $66 a month, and the arithmetic looks straightforward: $4,000 ÷ $66 = about 61 months, so hold the loan five years and you win.
That calculation is close to right and is missing two things that pull in opposite directions. The lower rate also amortises your balance faster, which shortens the true break-even by roughly nine months, and the $4,000 had an alternative use, which lengthens it. Both matter less, though, than the question the calculation cannot answer: will you still have this loan in five years? Points are the one mortgage decision that is entirely a bet on that.
The trade, priced
| Points | Cash at closing | Rate | Monthly payment | Break-even |
|---|---|---|---|---|
| −1 (lender credit) | +$4,000 to you | 7.00% | $2,662 | You are ahead for 59 months |
| 0 (par) | $0 | 6.75% | $2,594 | — |
| 1 | −$4,000 | 6.50% | $2,528 | 61 months simple / 52 true |
| 2 | −$8,000 | 6.25% | $2,463 | 61 months simple / 52 true |
| 3 | −$12,000 | 6.125% | $2,431 | 74 months. The exchange rate worsens |
Note the last row. Lenders frequently price the first one or two points at a clean 0.25% each and then get stingier. The third point here buys only 0.125%, which pushes its break-even past six years. Always ask for the price of each point separately rather than assuming a linear schedule.
The three events that void the bet
| Event | When it typically happens | Effect on the points |
|---|---|---|
| You refinance | Whenever rates drop 0.75–1.00% below yours | Total loss of the unrecovered portion. Points do not transfer to the new loan |
| You sell | Median homeowner tenure is well under thirty years | Total loss of the unrecovered portion |
| You prepay aggressively | Extra principal payments, or a lump sum | Shortens the loan, so fewer months of saving are collected. Partial loss |
| You keep the loan to term | Rare in practice | Maximum gain. About $23,400 of interest saved on this example |
| You recast or modify | After a large lump-sum payment | Rate is preserved, so points survive. The payment drops but the rate stays |
The first two rows are the reason points are riskier than the break-even suggests. Neither is unlikely, and neither is under your full control. A job move, a family change or a rate drop can arrive in year three. Points reward inertia, and inertia is not something you can promise yourself.
Lender credits: the same trade, reversed
Negative points work in the opposite direction. You accept a higher rate and the lender pays part of your closing costs. It is the same exchange rate running backwards, and it is under-used because it feels like accepting a worse deal.
- Take the credit when cash is the binding constraint. A buyer who is $4,000 short on closing costs and would otherwise reduce their down payment below a loan-to-value break is far better off taking the credit.
- Take the credit when you expect to refinance soon. If rates are high and you plan to replace this loan within a few years, paying for a rate you will not keep is straightforwardly wasteful.
- Take the credit on a short expected tenure. A job likely to relocate, a starter home, a two-to-three-year plan.
- Do not take the credit to buy more house. Raising your rate to stretch a budget makes the payment permanently higher, which is the opposite of what the stretch needs.
- Credits are capped at your actual closing costs. A lender credit cannot be paid out as cash to you.
Temporary buydowns are a different product entirely
A 2-1 or 3-2-1 buydown is often discussed alongside points and is not the same thing. Points buy a permanently lower rate. A temporary buydown pre-pays part of your interest for the first few years, and the rate then steps up to what it always was.
| 1 discount point | 2-1 buydown | |
|---|---|---|
| Cost | $4,000, from you | Usually paid by the seller or builder |
| Year 1 rate | 6.50% | 4.75% ($2,086 a month) |
| Year 2 rate | 6.50% | 5.75% ($2,334) |
| Year 3 onward | 6.50%. Permanently | 6.75%. Permanently |
| Where the money sits | Paid to the lender at closing | Escrow account, released monthly |
| If you refinance in year 2 | Unrecovered portion lost | Unused escrow is generally credited to your payoff |
| Qualifying | Underwritten at 6.50% | Underwritten at the full 6.75% |
The critical row is the last one. You must qualify at the eventual full rate, not the discounted starting rate, so a buydown does not help you afford a house you could not otherwise afford. It smooths the first two years of payments, which genuinely helps a household whose income is rising, and because the funds sit in escrow, an unused balance usually reduces your payoff if you refinance early, which makes a seller-paid buydown lower-risk than points.
Tax treatment, briefly and carefully
Discount points are prepaid interest, so they generally follow interest deductibility rules, which means they only help if you itemise, and most households now do not.
- On a purchase, points are generally deductible in the year paid, provided several conditions are met. The loan is secured by your main home, paying points is an established practice in your area, and the amount is not excessive.
- On a refinance, points are generally amortised over the life of the loan rather than deducted at once. If you refinance again later, the remaining unamortised balance can usually be deducted in that year.
- Seller-paid points on your purchase may still be deductible by you, subject to the same conditions. A genuinely surprising rule worth raising with a preparer.
- None of it matters unless you itemise. With the standard deduction where it now sits, most households do not, and the after-tax break-even then equals the pre-tax one.
- This is a general outline of the rules, not tax advice. Confirm your own position with a tax professional before relying on a deduction in your break-even.
The decision, honestly
- Held past break-even, points are a guaranteed, risk-free return. An unusual thing to be able to buy.
- The lower rate also builds equity faster, which shortens the honest break-even by roughly 15% against the simple calculation.
- A lower rate improves your debt-to-income ratio at underwriting, which can matter on a marginal approval.
- On a large loan the absolute saving is substantial: a full point off a $700,000 loan is well over $100,000 of interest across thirty years.
- If a seller or builder is funding closing costs, converting their money into rate is frequently the highest-value use of it.
- Refinancing or selling before break-even loses the unrecovered money outright. Points do not transfer and are not refunded.
- Cash spent on points is cash not spent on the down payment, reserves, or crossing a loan-to-value pricing break.
- The exchange rate degrades after the first point or two, so the third point often has a break-even beyond six years.
- The tax deduction most break-even calculations assume is unavailable to the majority of households who take the standard deduction.
- Buying points near the top of a rate cycle is paying for a rate you are relatively likely to abandon.
- The money is illiquid the moment it is paid, unlike reserves, which remain available for a roof or a job loss.
VerdictBuy points only when three things are true at once: you can name a specific reason you will hold this loan past the break-even month, rates are not obviously elevated relative to recent history, and the cash is genuinely spare after your down payment and reserves. Fail any one of those and take the par rate, or the lender credit, if you expect to refinance.
How to make the call in fifteen minutes
Ask for the full pricing ladder, not one option
Request the rate at −1, 0, 1, 2 and 3 points from the same lender on the same day. This reveals the actual exchange rate at each step and exposes the point where it worsens. Many lenders present only their preferred option.
Compute the simple break-even for each rung
Cost divided by monthly saving. Anything beyond about 60 months should face a much higher bar, because the probability of still holding the loan falls steeply after five years.
Sanity-check the cash against the alternatives
Would the same money cross you under 80% loan-to-value and eliminate mortgage insurance? Would it move you to a better credit-score pricing tier? Would it fill an empty emergency fund? All three usually beat points outright.
Name the reason you will keep this loan
Not a feeling. A reason. A school district you are committed to for twelve years. A job with no relocation. A rate already near historic lows so a refinance is unlikely. If you cannot state one, you are betting on inertia and should not pay for it.
If a seller is contributing, price the buydown against the price cut
Same dollars, two very different shapes. Front-loaded relief from a buydown versus a permanently smaller loan and lower property taxes from a price reduction. Which is better depends entirely on whether your constraint is the next two years or the next thirty.
Free calculator
Compute the exact break-even month on the points you have been quoted
Before you pay for points
- Rate quoted at −1, 0, 1, 2 and 3 points from the same lender, same day
- Exchange rate confirmed for each point separately, not assumed linear
- Simple break-even computed, and compared against your honest holding period
- Emergency reserves fully funded first
- Loan-to-value pricing breaks checked. The cash may be worth more as down payment
- Credit-score pricing tier checked for the same reason
- A specific, nameable reason you will hold this loan past break-even
- Current rates compared to the last few years, since points are a bet against a refinance
- Seller-funded buydown priced against a seller-funded price reduction, if applicable
- $4,000
- One point on a $400,000 loan
- $66
- Monthly saving from that point
- 52 mo
- True break-even, equity counted
- $23,400
- Interest saved if held to term
Buys about 0.25% of rate
$2,594 to $2,528
Versus 61 simple
The maximum outcome
Points pay a guaranteed return to whoever still holds the loan in five years. The only real question is whether that person is going to be you.
Frequently asked questions
- What is a mortgage point worth?
- One point costs 1% of the loan amount and typically buys about 0.25% off the rate, though the exchange rate varies by lender and by day and usually worsens after the first one or two points. On a $400,000 loan, one point is $4,000 and saves roughly $66 a month. Always ask for the price of each point separately rather than assuming the schedule is linear.
- How do I calculate the break-even on points?
- Divide the cost by the monthly payment saving, $4,000 ÷ $66 is about 61 months. The more accurate version also counts the faster principal reduction at the lower rate, which brings the honest break-even to roughly 52 months. Subtracting the opportunity cost of the cash pushes it back toward 60, which is why the simple calculation survives as a workable rule despite being wrong in both directions.
- Do I lose the money if I refinance?
- Yes. The unrecovered portion is gone. Points are prepaid interest on that specific loan; they do not transfer to a new one and they are not refunded. This is why buying points near the top of a rate cycle is risky: a rate drop that triggers a sensible refinance in year three also destroys most of what you paid.
- What are negative points or lender credits?
- The same trade in reverse. You accept a higher rate and the lender pays part of your closing costs. They are the right choice when cash is your binding constraint, when you expect to refinance within a few years, or when your holding period is genuinely short. Credits are capped at your actual closing costs and cannot be paid out to you as cash.
- Is a 2-1 buydown the same as buying points?
- No. Points buy a permanently lower rate. A temporary buydown pre-pays part of your interest for the first two or three years, after which the rate steps up to what it always was. Critically, you must qualify at the full eventual rate, so a buydown does not make a house affordable that otherwise is not. Its main advantages are that sellers and builders frequently fund it, and that an unused escrow balance is generally credited back if you refinance early.
- Are mortgage points tax deductible?
- On a purchase they are generally deductible in the year paid if several conditions are met; on a refinance they are generally amortised over the life of the loan, but points follow mortgage interest rules, which means they only help if you itemise, and most households now take the standard deduction, in which case the after-tax break-even is simply the pre-tax one. Confirm your own position with a tax professional rather than building a deduction into the calculation.
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