Discount points trade **cash at closing** for a **lower note rate**. One point is typically **1% of the loan amount**. Lenders often advertise about **0.25%** rate reduction per point, but the exact trade is a price sheet, not a law of nature. The decision is a clock: how many months of payment savings repay the upfront cost before you move or refinance? This guide owns that break-even formula and a verified horizon twin. Open the Mortgage Calculator to compare P&I at two rates on the same loan.
What this guide owns
- What discount points cost and what they usually buy.
- Break-even months = points cost ÷ monthly P&I savings.
- Horizon twin: leave early vs hold past break-even vs hold to term.
- Light tax literacy (purchase vs refinance; itemize caveat) and points vs temporary buydowns.
- Handoffs to mortgage calculator, escrow, and refinance break-even siblings.
It is not an escrow shortage recovery twin and not a P&I-only input-mistake checklist.
What a point is
Cost of 1.0 point ≈ 0.01 × loan amount
Example: loan **$300,000** → 1.0 point ≈ **$3,000** at closing (separate from title, appraisal, and other fees).
You can buy fractional points. More points cost more cash and usually buy a lower rate, with diminishing or non-linear pricing depending on the lender’s sheet.
Discount points permanently change the note rate for that loan. They are not the same as a temporary seller-paid **2-1 buydown**, which lowers the payment for early years and then steps up.
Break-even formula
Monthly savings ≈ P&I(no points) − P&I(with points) Break-even months ≈ points cost ÷ monthly savings
If your expected hold (or years until a likely refinance) is **shorter** than break-even, the cash buy is underwater on payment savings alone. If you hold **longer**, payment savings can repay the points and then keep compounding as lower interest.
This ignores opportunity cost of cash and ignores tax effects. It is the clean payment clock lenders and shoppers actually argue about.
Verified twin: $300,000, 30 years, 6.50% vs 6.25%
Illustrative: assume **1.0 point ($3,000)** buys a **0.25%** rate cut. Your quote may differ.
| Path | Rate | P&I (approx.) | |---|---:|---:| | No points | 6.50% | **$1,896** | | 1 point | 6.25% | **$1,847** | | Monthly savings | | **~$49** |
Break-even ≈ 3,000 ÷ 49 ≈ 61 months (~5.1 years)
Horizon peel
| Hold | Payment savings | Net vs $3,000 cost (approx.) | |---|---:|---:| | 3 years (36 mo) | ~$1,766 | **−$1,234** (behind) | | 5 years (60 mo) | ~$2,943 | **−$57** (about flat) | | 30 years (360 mo) | ~$17,659 | **+$14,659** (ahead on payments) |
Interest if both loans run to term (illustrative):
Total interest @ 6.50% ≈ $382,600 Total interest @ 6.25% ≈ $365,000 Interest difference ≈ $17,600 before subtracting the $3,000 point cost
Payment break-even and lifetime interest savings are related but not identical clocks. Use both: months to recover cash, and total interest if you truly keep the loan.
Run the two rates on the Mortgage Calculator. Keep tax, insurance, and HOA identical so only P&I moves.
When points often fail the honesty test
- You expect to **move or refinance** before ~break-even.
- The $3,000 would otherwise finish a down payment, reserves, or closing cash you actually need.
- The lender’s sheet barely moves the rate for the cash asked.
- You are comparing points on P&I while ignoring that escrow can still jump (see mortgage escrow explained).
A “5-year rule of thumb” is only a talk track. Your break-even might be 36 months or 90 months. Compute it.
Purchase vs refinance tax literacy (short)
Points on a **purchase** may be deductible in the year paid if you itemize and rules are met. Points on a **refinance** are often deducted over the life of the loan, with remaining unamortized amounts sometimes deductible if you refinance again. Standard deduction levels mean many filers get **no** incremental benefit from itemizing points. This is not tax advice; confirm with current IRS rules or a professional.
Points vs temporary buydowns
| Tool | What it does | Best literacy question | |---|---|---| | Discount points | Lower note rate for the life of that loan | Will I hold past break-even? | | Temporary buydown (e.g. 2-1) | Lower payment early, then step up | Is early cash flow worth the later step? |
Seller credits sometimes fund buydowns. Points are usually borrower-paid cash for rate. Ask the Loan Estimate which fees are optional points versus required charges.
Refinance sibling handoff
If the question is “should I refinance an existing loan?”, break-even on **closing costs vs new payment** is a different problem. That story lives in refinance guides (including term-reset traps). Points on a new refinance still use the same months = cost ÷ savings idea, with tax amortization differences.
FAQ
How much does one point lower my rate?
Often about 0.25%, but lenders set the trade daily. Always read the priced options on your Loan Estimate.
What is break-even for points?
Roughly points cost divided by monthly P&I savings. Hold longer than that for payment math to repay the cash.
Are points worth it on a 15-year loan?
Fewer months to recover cost. Recalculate savings and break-even; do not copy a 30-year rule of thumb.
What if I refinance before break-even?
You may not recover the cash via payment savings. Refinance tax treatment of remaining points is a separate itemize question.
Can I buy points after closing?
Generally no on that same loan. After funding, a new rate usually means a new refinance (with new costs).
Bottom line
Price the point in dollars, measure monthly P&I savings, and divide. If your honest hold is shorter than break-even, keep the cash. If you will keep the loan past the clock, model the lower rate on the Mortgage Calculator and confirm the lender’s actual point sheet before you wire funds.