Mortgage Points: What They Cost and When They Pay Off

A discount point costs 1% of your loan amount and buys a permanently lower interest rate. On a $400,000 mortgage that’s $4,000 at closing, and the pitch writes itself: pay a bit now, save every month for thirty years.

The pitch is sound. The arithmetic behind it, as it’s usually presented, is not — and the standard break-even calculation you’ll find on every lender’s site quietly makes an assumption that flatters the answer by about ten months.

First, Ask What the Point Actually Buys

There is no fixed exchange rate. A point usually takes somewhere between 0.125% and 0.25% off your rate, and on the same loan on the same day, different lenders will price it anywhere in that band.

That spread decides everything. Here’s the same $400,000 loan at a 6.66% base rate:

Same money, same loan. The bottom row takes twice as long to pay for itself as the second, purely because of what the lender is willing to give you for the point. If a loan officer offers you points without telling you the rate reduction, that number is the only question that matters.

The Break-Even Everyone Calculates Wrong

Cost divided by monthly saving. $4,000 over $66 is 61 months, so 5.1 years — the figure our points calculator shows on the left. That’s the number every points calculator gives you, and it contains a hidden assumption: that if you don’t buy the point, the $4,000 does nothing.

It won’t do nothing. The realistic alternative is putting it straight onto the principal at closing, which lowers your balance, cuts interest for the whole life of the loan, and shortens the term. Compare against that and the picture changes:

Net cost means every payment made plus the $4,000, plus whatever balance is left when you walk away. The point doesn’t actually pull ahead until month 71— 5.9 years, not 5.1. The conventional formula is optimistic by roughly ten months.

And at the far end it flips back. Hold the loan to payoff and the extra principal wins by $4,564, because that $4,000 applied at month one stops compounding interest for three decades and retires the loan eleven months early. Buying points is a middle-of-the-distribution bet: it wins if you keep the mortgage roughly seven to twenty-five years, and loses on both sides of that.

The Tax Rule That Moves the Needle

Points are prepaid interest, so they inherit the mortgage interest rules — and the treatment differs sharply depending on why you paid them.

On a purchase, points on your main home can generally be deducted in full in the year you pay them, provided you meet the IRS conditions. That’s a meaningful acceleration: in the 22% bracket, a $4,000 point effectively costs $3,120, and the simple break-even drops from 5.1 years to 3.9.

On a refinance, you normally can’t. Points paid solely to refinance have to be deducted ratably across the life of the loan — $4,000 over 30 years is about $11 a month, which is not going to change anyone’s decision.

The exception is worth money. If you paid points on a refinance, have been deducting them a little at a time, and then refinance again, the undeducted balance can generally be written off in full in the year you pay that loan off. People refinance twice and never claim it. If that describes you, it is a specific thing to raise with whoever prepares your return.

The catch on all of this: it only helps if you itemize. Since the standard deduction rose, most households don’t, and for them points are simply a cash cost with no tax offset. Work out whether you’ll itemize at all before you factor the deduction into your break-even — our mortgage interest deduction calculator will tell you, and the state-by-state guide covers where your state rules diverge from the federal ones.

When Points Are Worth It

Buy them when three things are true at once: the lender is giving you a genuine 0.25% for the point rather than 0.125%, you are confident you’ll hold the loan past year seven, and you have the cash spare after your down payment and reserves. Miss any of the three and the answer is usually no.

Skip them when you expect to refinance. Paying $4,000 for a rate you intend to replace in two years is simply a $4,000 loss, and this is the most common way buyers lose money on points — especially when rates look likely to fall. Skip them too if buying points would leave you thin on reserves; liquidity after closing is worth more than $66 a month.

One more comparison worth running before you decide. If your goal is the lowest payment rather than the lowest lifetime cost, points are a small lever. Term is a much bigger one — and a much more expensive one. Our 30 vs 40 vs 50-year comparison shows what that trade actually costs, and it’s a useful reference point for how little $4,000 moves a monthly payment either way.