Should You Pay for Mortgage Points?

On a purchase, buying points to lower your rate is usually a smart move, and it is close to a no-brainer when the seller is helping with your closing costs. My philosophy on a purchase is simple. Get the lowest rate you can at the closing table, because that rate stays with you for the life of the loan. A payment you lock in today is a payment you keep paying for years, so it is worth spending to bring it down.

Here is how points work, and the one situation where they do not pay off.

What a discount point is

One discount point costs one percent of your loan amount and typically lowers your rate by about 0.25 percent. On a $400,000 loan, one point is $4,000, and it might move your rate from 6.75 percent down to 6.50 percent. That is roughly $60 to $70 less per month. Points are prepaid interest, and they show up on your Loan Estimate under origination charges. You can model different combinations with our rate buydown calculator.

The breakeven, in plain terms

To know if points pay off, divide the cost by the monthly savings. That gives you the breakeven month. Using the numbers above, $4,000 divided by about $65 a month is roughly 62 months, a little over five years. Stay in the loan past that point and the rest is savings. That is why points reward buyers who plan to keep the home and the loan for a while.

Why it is close to free when the seller pays

This is the part most buyers miss. On a purchase you can often get the seller to cover closing costs through seller concessions. When you steer some of that credit toward points, it is the seller's money buying down your rate, not yours. You get a lower payment for the life of the loan without spending your own cash. If you have room to negotiate concessions, using them to buy points is one of the best trades on the table. It beats a small price cut in most cases, because the rate savings compound month after month.

The one time to skip points

If you are paying with your own limited cash and there is a real chance you will sell or refinance within a few years, points may not pay off before you break even. In that case, keep the cash, or put it toward your down payment instead. And do not confuse permanent points with a temporary 2-1 buydown, which lowers your rate for only the first two years and then jumps back up.

When you get pre-approved, I will show you your rate with zero, one, and two points side by side so you can see the tradeoff in real dollars.