See how much buying discount points would cost, how much they'd lower your monthly payment, and how many months it takes to break even.
Mortgage discount points are an upfront fee you pay a lender at closing in exchange for a lower interest rate on your loan. One point typically costs 1% of your loan amount and typically lowers your rate by about 0.25%, though the exact reduction varies by lender. Buying points only makes sense if you plan to keep the loan long enough to recoup the upfront cost through lower monthly payments.
Cost of points = Loan Amount × (Cost per Point % ÷ 100) × Number of Points. Monthly payments before and after are calculated with the standard amortization formula, and the break-even period in months is:
Break-Even (months) = Cost of Points ÷ Monthly Savings
On a $300,000 loan at 7.0%, buying 2 points at 1% each costs $6,000 and lowers your rate to 6.5% (assuming a 0.25% reduction per point). The payment drops from about $1,996/month to about $1,896/month — a savings of roughly $100/month. Dividing $6,000 by $100 gives a break-even point of about 60 months, or 5 years.
Buying points generally pays off if you plan to stay in the home (or keep the loan without refinancing) longer than the break-even period. If you expect to sell or refinance sooner, keeping your cash instead of prepaying interest is usually the better choice.
Optional upfront fees paid for a reduced interest rate, typically 1% of the loan amount per point.
Upfront cost of points divided by monthly savings, showing months until savings outweigh cost.
When you plan to keep the mortgage longer than the break-even period.