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Mortgage Points: When to Buy, Break-Even Math, and Tax Implications

A comprehensive guide to mortgage discount points: how they work, when buying points makes sense, break-even calculations, and how they affect your taxes.

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Ahmet C. Toplutaş

12/15/2025

16 min read

Mortgage points (also called discount points) let you pay upfront to lower your interest rate. One point costs 1% of your loan amount and typically reduces your rate by 0.25%. The question is: does buying points save money? The answer depends on how long you'll keep the loan. This guide shows you how to calculate the break-even point and when points make sense.

1) What mortgage points are (and how they work)

Mortgage points are upfront fees you pay to reduce your interest rate. One point = 1% of your loan amount. For example, on a $300,000 loan, one point costs $3,000. Typically, one point reduces your rate by 0.25% (though this varies by lender and market conditions). So if your rate is 6.5%, buying one point might lower it to 6.25%. Points are paid at closing and are separate from other closing costs. You can buy fractional points (e.g., 0.5 points) or multiple points (e.g., 2 points = 2% of loan amount).

2) The break-even calculation (the key math)

Break-even is how long it takes for monthly savings to repay the upfront cost of points. Formula: Break-even months = (Cost of Points) / (Monthly Payment Savings). For example, if points cost $3,000 and save $50/month, break-even = $3,000 / $50 = 60 months (5 years). If you'll keep the loan longer than break-even, points save money. If you'll refinance or move before break-even, you lose money. Always calculate break-even before buying points.

3) When points make sense (the 5-year rule)

Points typically make sense if: (1) You'll keep the loan 5+ years (past break-even). (2) You have cash available and want to lower monthly payments long-term. (3) You're in a high tax bracket and can deduct points (see tax section). (4) You're buying a jumbo loan where points have bigger impact. Points usually don't make sense if: (1) You'll move or refinance within 3-5 years. (2) You need cash for down payment, closing costs, or emergency fund. (3) You're in a low tax bracket (less benefit from deduction).

4) Tax implications (points are deductible)

Mortgage points are tax-deductible, but the rules depend on whether you're buying or refinancing. For purchase loans: points are fully deductible in the year you buy the home. For refinances: points must be amortized (deducted) over the life of the loan. If you refinance again before the loan term ends, you can deduct the remaining unamortized points in that year. The deduction only helps if you itemize (not take standard deduction). With the higher standard deduction ($29,200 for married couples in 2024), many homeowners don't benefit from the points deduction.

5) Points vs rate buydown (different strategies)

Points permanently lower your rate for the life of the loan. A rate buydown (e.g., 2-1 buydown) temporarily lowers your rate for the first 1-3 years, then it increases. Buydowns are often paid by the seller (as an incentive) and are useful if you expect income to increase. Points are better for long-term savings, buydowns are better for short-term cash flow. Compare both options with your lender.

6) Real example: $300,000 loan at 6.5%

Scenario: $300,000 loan, 30-year term, 6.5% rate. Option 1: No points, payment = $1,896/month. Option 2: Buy 1 point for $3,000, rate = 6.25%, payment = $1,847/month. Monthly savings = $49. Break-even = $3,000 / $49 = 61 months (5.1 years). Over 30 years, total savings = ($49 × 360) - $3,000 = $14,640. But if you move in 3 years, you lose $3,000 - ($49 × 36) = $1,236. The longer you keep the loan, the more points save.

❓Mortgage Points FAQ

Can I negotiate points with the lender?

Yes, points are negotiable. Some lenders offer better point pricing than others. Shop around and compare: (1) rate with 0 points, (2) rate with 1 point, (3) rate with 2 points. Calculate break-even for each option to find the best deal.

Are points worth it on a 15-year loan?

Points are usually less valuable on shorter loans because you have fewer months to recoup the cost. However, if the rate reduction is significant and you'll keep the loan to term, they can still make sense. Calculate break-even carefully.

What if I refinance before break-even?

If you refinance before break-even, you lose the upfront cost of points. However, if you refinance into a new loan, you can deduct any remaining unamortized points in that tax year (if you itemize).

Can I buy points after closing?

No, points must be purchased at closing. Once the loan is funded, you cannot retroactively buy points to lower your rate. You'd need to refinance to get a lower rate.

Key Takeaways

Mortgage points can save significant money over the life of a loan, but only if you'll keep it long enough to pass the break-even point. The key is to calculate break-even accurately, factor in tax benefits (if you itemize), and be honest about how long you'll keep the loan. For most borrowers who plan to stay 5+ years, buying 1 point often makes sense. For shorter timelines or if you need cash flexibility, skip the points and invest the money elsewhere. Use the mortgage calculator to model different point scenarios and see the impact on your monthly payment and total interest.

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