Mortgage [Discount Points](/blog/mortgage-points-explained) Calculator Guide: When Buying Down Your Rate Actually Pays Off

When you're closing on a home, your lender will almost certainly offer you the option to "buy down" your interest rate by paying mortgage discount points upfront. It sounds appealing — who wouldn't want a lower rate? But whether paying points actually saves you money depends entirely on one critical number: your break-even month.

This guide walks you through exactly how to calculate that number, what scenarios make points worthwhile, and the mistakes that cause homebuyers to spend thousands unnecessarily.

What Are Mortgage Discount Points?

A mortgage discount point is a fee paid at closing equal to 1% of the loan amount that permanently reduces your interest rate. The typical trade: each point buys down your rate by approximately 0.25%, though this varies by lender and market conditions.

Example:

• Loan amount: $400,000
• Base rate: 7.00%
• One point cost: $4,000
• Rate after one point: ~6.75%

Points are distinct from origination fees (which compensate the lender for processing your loan) and lender credits (the opposite of points — you accept a higher rate in exchange for lower [closing costs](/blog/homebuying-closing-process)). Don't confuse these — they serve different purposes.

How the Break-Even Calculation Works

The break-even month is when your cumulative monthly savings finally equal what you paid upfront for the points. Until then, you're behind. After that, you're ahead.

The formula:

Break-Even Months = Point Cost ÷ Monthly Savings

Example:

• Loan: $400,000
• Rate without points: 7.00% → Monthly P&I: $2,661
• Rate with 1 point ($4,000): 6.75% → Monthly P&I: $2,594
• Monthly savings: $67
• Break-even: $4,000 ÷ $67 = ~60 months (5 years)

If you stay in the home or keep the loan for more than 5 years, you come out ahead. If you sell or refinance before month 60, you lose money on the points.

The Full Cost Analysis: Don't Forget Opportunity Cost

The simple break-even calculation above ignores one important factor: what else you could do with that $4,000.

If you invested $4,000 at a conservative 6% annual return instead of paying for points, that money would grow to approximately $5,352 in 5 years. This means your actual break-even is longer than the simple calculation suggests.

A more accurate approach:

Adjusted Break-Even = Upfront Point Cost × (1 + Investment Return Rate)^Years ÷ Monthly Savings

Using a 6% opportunity cost on our $4,000:

• True cost at 5 years: ~$5,352
• Monthly savings: $67
• Adjusted break-even: ~$5,352 ÷ $67 = ~80 months (6.7 years)

This means you'd need to keep the loan for nearly 7 years before you truly break even when accounting for lost investment opportunity.

Points Across Different Loan Amounts

The dollar impact of points scales directly with loan size. Here's how the break-even looks at different loan amounts, assuming 1 point buys down 0.25% and your savings are $67 per $100,000 borrowed:

The break-even timeline is roughly consistent regardless of loan size (since both cost and savings scale proportionally). This means time in the home is the key variable, not loan size.

When Paying Points Makes Sense

1. You're Buying Your Forever Home

If you genuinely plan to live in the home for 20–30 years, paying 1–2 points upfront can save tens of thousands of dollars over the loan's life.

30-Year Example:

• $400,000 loan at 7.00%: Total interest = $556,163
• $400,000 loan at 6.50% (2 points = $8,000): Total interest = $510,838
• Net savings over 30 years: $37,325 after the $8,000 point cost

2. You Have Extra Cash After Closing

Points only make sense if purchasing them doesn't drain your reserves. Financial advisors generally recommend keeping 3–6 months of expenses in an emergency fund after closing. If buying points jeopardizes that cushion, don't do it.

3. You Can't Refinance Easily

Some [homeowners](/blog/home-insurance-savings) — self-employed borrowers, people with unconventional income, those with lower credit scores — find refinancing difficult or expensive. If locking in a low rate now is your best opportunity, points become more valuable.

4. Rates Are Elevated and Unlikely to Drop Soon

If you buy points when rates are historically high and then rates drop sharply, you might refinance — rendering your points investment worthless. In an environment where rates are expected to remain elevated, points carry less refinancing risk.

When Paying Points Is a Waste of Money

1. You're Likely to Move or Refinance Within 5 Years

The National Association of Realtors reports that the median tenure in a home is around 8 years, but many buyers move sooner. If your career, family situation, or market dynamics suggest you'll move within 5 years, skip the points.

2. You're Stretching to Afford the Closing Costs

If you're already tight on funds for the down payment and closing costs, don't add points to the pile. That cash is more valuable as an emergency fund or as extra equity.

3. Rates Are High and Expected to Fall

If there's a realistic chance you'll refinance within 2–3 years at a lower rate, you'll lose your points investment. Learn how mortgage rate buydowns interact with refinancing strategy.

4. The Lender's "Point-to-Rate" Trade Isn't Favorable

Lenders are not required to offer a fixed trade of 0.25% per point. Some offer only 0.125% per point, which doubles your break-even time. Always ask: "How much does each point reduce my rate?" before agreeing.

Permanent vs. Temporary Buydowns: Know the Difference

In 2026, many builders and motivated sellers are offering temporary rate buydowns as an incentive. These are different from permanent discount points.

Common temporary buydowns:

• 2-1 Buydown: Rate is 2% lower in year 1, 1% lower in year 2, then reverts to the full note rate in year 3 and beyond
• 3-2-1 Buydown: Three years of stepped reductions before reverting to the full rate

Temporary buydowns can help cash flow in the early years but don't permanently reduce your rate. They work best when you expect income growth or when you're buying from a builder willing to fund the buydown as a selling incentive.

Compare this to permanent points, which are:

• Paid once at closing
• Reduce your rate for the life of the loan (unless you refinance)
• More valuable the longer you hold the loan

Tax Deductibility: A Factor Worth Considering

Mortgage discount points are potentially tax-deductible in the year you pay them (for your primary residence, when used to buy the home). This can effectively reduce the after-tax cost of points for homeowners who itemize deductions.

For a taxpayer in the 22% marginal bracket:

• 1 point on a $400,000 loan = $4,000 upfront cost
• After 22% tax deduction: effective cost = $3,120
• This slightly shortens the break-even period

Consult a tax professional about your specific situation, as the mortgage interest deduction has limitations under current tax law. The IRS Publication 936 covers home mortgage interest deductibility in detail.

Negotiating Points: It's Not Fixed

Don't treat the lender's initial points offer as final. Points — and the rate reductions they buy — are negotiable. Here's how to approach it:

1. Get multiple quotes with identical loan parameters from at least 3 lenders
2. Ask each lender for their "par rate" — the rate with zero points
3. Compare the point-to-rate trade across lenders (some are more generous than others)
4. Consider lender credits as the inverse option — accept a slightly higher rate in exchange for lender-paid closing cost help

Shopping aggressively can yield dramatically different point structures. What costs 2 points at one lender might cost 1.5 points at another for the same rate reduction.

How Points Affect Your HELOC and Refinancing Options

If you pay points on your purchase mortgage and later want to open a HELOC or refinance, those paid points are sunk costs. However, understanding how much equity you've built matters:

• Paying points doesn't build equity — they're closing costs, not principal paydown
• Your home's appraised value and loan balance determine HELOC access
• When you refinance, you may be able to deduct points from the original loan on a prorated basis

Learn more about how HELOC qualification and equity access work alongside your mortgage.

The Lender Credit: The Opposite of Points

If saving upfront cash matters more than monthly savings, lender credits work in reverse. You accept a higher rate in exchange for the lender covering some or all of your closing costs.

Example:

• Base rate: 7.00%
• With 1 lender credit: Rate = 7.25%, lender pays $4,000 toward closing costs

This can make sense if:

• You're short on cash at closing
• You plan to refinance within a few years
• You'd rather have the cash invested than reducing your rate

The same break-even math applies in reverse — but this time, the longer you stay, the more the higher rate costs you.

Quick Decision Checklist

Before paying mortgage discount points, answer these questions:

☐ How long do I plan to stay in this home or keep this loan? (Need 5+ years for most points to pay off)
☐ Do I have a fully funded emergency fund AFTER paying for points? (If not, skip the points)
☐ What's the exact rate reduction per point at this lender? (0.25% is standard; less than 0.125% is usually not worth it)
☐ Am I likely to refinance if rates drop? (If yes, factor in refinancing risk)
☐ Have I compared this lender's points structure against at least 2 competitors? (Always shop around)
☐ Will I itemize deductions and benefit from the tax deduction? (Potentially reduces effective cost by 22%–37%)

HonestCasa's Bottom Line

Mortgage discount points are a powerful tool that can save sophisticated homebuyers tens of thousands of dollars — but only when used correctly. The math is brutally simple: divide your upfront cost by your monthly savings. If that number is less than the months you plan to hold the loan, buy the points. If not, keep your cash.

The most common mistake homebuyers make is paying for points without doing the break-even math. The second most common mistake is forgetting to account for the opportunity cost of that upfront cash.

Run the numbers. Make the decision rationally, not emotionally.

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