Paying points only works when the break-even month lands before you sell or refinance.
A discount point is prepaid interest: you hand the lender cash at closing to get a lower rate and a lower monthly payment for the life of the loan. The decision comes down to one number — the break-even month. On the default scenario below — a $400,000 loan, 6.75% without points vs 6.25% after paying 1.5 points ($6,000) — the lower rate saves about $132/month and breaks even at roughly 3 years 10 months. Keep the loan past that and the points win; sell or refinance sooner and they lose money.
The calculator computes the standard amortized payment at the rate without points and again at the bought-down rate. The gap between those two payments is your monthly saving. The point cost is the loan amount times the points percentage. Divide the cost by the monthly saving and you get the number of months it takes to recover the upfront cash — the break-even.
Point cost = loan amount × points% (1 point = 1% of the loan)Monthly saving = payment at higher rate − payment at lower rateM = P · [ r(1+r)n ] / [ (1+r)n − 1 ] — amortized payment at each rateLifetime saving = monthly saving × total months − point costCompare the break-even month to how long you realistically expect to keep this exact loan — not the house, the loan. The typical US mortgage is paid off or refinanced in well under ten years. If your break-even is later than your likely exit, skip the points.
Those figures match this calculator's output for the default inputs. Hold the loan only 7 years and you still come out about $5,048 ahead; refinance at year 3 and you lose roughly $1,000.
More points buy a lower rate and bigger monthly savings, but the upfront cost grows in step, so break-even does not collapse as fast as you might expect.
| Points paid | Upfront cost | Approx. rate | Break-even |
|---|---|---|---|
| 0 points | $0 | 6.75% | — |
| 0.5 point | $2,000 | ~6.58% | ~3.5–4 yrs |
| 1.0 point | $4,000 | ~6.42% | ~3.5–4 yrs |
| 1.5 points | $6,000 | 6.25% | 3 yrs 10 mo |
| Negative points | Credit to you | Higher | n/a (no break-even) |
| $400k loan, 30-year term. The 1.5-point row matches the engine exactly. Rate per point varies by lender and day — use the calculator with your locked quote. | |||
One discount point costs 1% of the loan amount and is paid at closing. On a $400,000 loan, one point is $4,000 and 1.5 points is $6,000. Each point typically lowers the interest rate by roughly 0.125% to 0.25%, though the exact reduction is set by the lender's rate sheet on the day you lock and is not fixed by law.
Break-even months = total point cost divided by the monthly payment reduction the lower rate produces. For example, paying $6,000 to cut the payment by about $132 a month breaks even in roughly 46 months, or about 3 years 10 months. If you keep the loan past that point, the points have paid for themselves; sell or refinance sooner and you lose money on them.
Points are worth it when you are confident you will keep the loan well past the break-even month, you have cash to pay them without shrinking your down payment or reserves, and you are not likely to refinance soon. They are a poor choice if you might move or refinance within a few years, since you would not hold the loan long enough to recoup the upfront cost. The refinance calculator can help estimate how likely an early refinance is.
Discount points are prepaid mortgage interest. On a loan to buy or build your main home, points are generally deductible in the year paid if you itemize and several IRS conditions are met. Points on a refinance usually must be deducted gradually over the life of the loan. See IRS Publication 936 and Topic No. 504, and confirm with a tax professional for your situation.
Negative points, also called lender credits or rebate pricing, are the reverse of discount points: you accept a higher interest rate and the lender pays you a credit toward closing costs. This raises your monthly payment but lowers cash needed at closing, which can make sense if you are short on cash or plan to sell or refinance quickly.
Yes. The rate-and-point combination shown on a Loan Estimate is only guaranteed if you lock it. Pricing moves daily with the market, so the reduction a point buys can change before closing unless your rate and points are locked in writing. Always confirm the locked rate, point cost, and lock expiration date.
No. Discount points are optional prepaid interest that lower your rate. Origination points are a lender fee for processing the loan and do not reduce the rate. Both are expressed as a percentage of the loan amount, so read the Loan Estimate carefully to see which you are being charged.
Yes. APR reflects the note rate plus certain financing costs, including discount points, spread over the loan term. Paying points lowers the note rate but the upfront cost is folded into APR, which is why APR is a better way to compare two offers than the rate alone, especially when one offer includes points.
It depends on your goal. A larger down payment lowers the loan balance, can remove PMI, and improves equity. Points lower the rate but only pay off if you hold the loan past break-even. If you have limited cash, reaching a down-payment threshold that removes mortgage insurance usually beats buying points. The home affordability calculator can frame the down-payment side.
Point pricing is part of the rate sheet and can sometimes be negotiated alongside other closing costs or covered by a seller credit. Points are normally paid in cash at closing rather than financed, because financing them would add interest cost and undercut the savings the points were meant to deliver.
This calculator is for education, not financial or tax advice. Point pricing, the rate each point buys, and tax treatment depend on your lender, loan purpose, and filing situation. Confirm the locked figures on your Loan Estimate and consult a licensed advisor before closing.