Compare paying points to buy down your mortgage rate vs no-points scenario.
Break-even months
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Points cost
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Monthly savings
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Your breakdown
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Paying cash today for a cheaper rate
Discount points are prepaid interest. You hand the lender money at closing, and in exchange they lower your mortgage rate for the life of the loan. One point costs 1 percent of the loan amount and typically buys somewhere around a quarter point off the rate, though the exact trade varies by lender and day. The deal is simple to state and surprisingly easy to get wrong: you are spending a known lump sum now to capture a smaller monthly saving that only pays off if you keep the loan long enough. This calculator finds that crossover point for your specific numbers.
Do not confuse discount points with origination points or lender fees. Origination points are a charge for making the loan and buy you nothing on the rate. Only discount points lower your interest rate, and only discount points are the subject of this break even math.
The break-even month that decides it
The whole decision reduces to one number: how many months of lower payments it takes to recover what you paid for the points. The tool computes your monthly payment at the higher no points rate and again at the lower with points rate, takes the difference, and divides the upfront cost by that monthly saving. The result is your break even in months. Keep the loan past that point and the points were worth it. Sell or refinance before it, and you lost money on the trade.
Two points on a $400,000 loan
Say you borrow $400,000 on a 30 year loan. Without points the rate is 7.0 percent; paying 2 points drops it to 6.5 percent. Two points on $400,000 cost $8,000 at closing. The payment falls from about $2,661 a month to about $2,528, a saving of roughly $133 a month. Divide $8,000 by $133 and you get a break even of about 61 months, just over 5 years. The tool flags this as worth it if you expect to keep the mortgage well beyond that horizon.
The chart shows the running net position: you start $8,000 in the hole and climb back to break even near month 61.
When break-even beats your hold
The break even is only half the answer. The other half is how long you will actually keep this exact loan, and people consistently overestimate it. The median homeowner moves or refinances long before 30 years. If there is any real chance you will sell or refinance inside your break even window, points are a bad bet, because a refinance resets the rate and the unrecovered points are simply gone. Points reward people with a clear, long horizon: a forever home, a stable job, no plans to move. My rule of thumb is to buy points only when your honest expected hold is comfortably longer than the break even, not merely equal to it, because life intervenes.
One more wrinkle to weigh: the $8,000 you spend on points has an opportunity cost. Invested elsewhere it could earn a return, and prepaying the loan or keeping the cash liquid might serve you better. Run the break even, then sanity check it against what else that money could do.
Are mortgage points tax deductible?
Often, yes, if you itemize. Points paid to buy down the rate on a loan to purchase or build your main home are generally deductible in the year you pay them, subject to the rules in IRS Publication 936. Points on a refinance usually have to be deducted gradually over the life of the loan rather than all at once. Most taxpayers now take the standard deduction, so confirm that itemizing makes sense for you before counting on the deduction in your break even math.
Can I negotiate points, or are they fixed?
The rate and point structure is negotiable, and lenders quote it differently, so compare offers on equal footing. Ask each lender for a no points quote and a with points quote on the same loan so you can see the true price of the rate reduction. Sometimes a seller or builder will pay points on your behalf as a concession, which changes the calculus entirely because the upfront cost is not coming out of your pocket.