Should You Buy Mortgage Discount Points?
When shopping for a home mortgage loan, lenders often present you with the option to pay upfront discount points to lower your interest rate. While a lower interest rate is always attractive, it comes at a steep upfront cash cost at closing. Determining whether this trade-off is financially beneficial depends entirely on your **break-even period**.
This calculator is designed to perform a complete break-even analysis by calculating the upfront cost of points, your reduced monthly payment, and the exact number of months required to recoup your investment.
Understanding the Trade-off of Discount Points
Buying discount points is essentially prepaying a portion of your interest to secure a permanently lower mortgage rate. The standard convention is:
- 1 Discount Point = Costs **1% of your loan amount** (e.g., $4,000 on a $400,000 loan).
- Rate Reduction = Reduces your mortgage interest rate by **0.25%** (e.g., from 6.5% down to 6.25%).
The Break-Even Formula Explained
The math to determine your break-even timeline is direct:
Break-Even Month = Upfront Cost of Points ÷ Monthly Payment Savings
For example, if you buy 1 point on a $300,000 mortgage at 6.5% interest, the point costs $3,000. This reduces your rate to 6.25%, saving you approximately $49.33 per month on your principal & interest payment. Dividing $3,000 by $49.33 yields a break-even period of **60.8 months** (roughly 5 years).
When Buying Points Makes Sense (And When to Avoid)
Buying points is highly beneficial under specific homeownership timelines:
- Buy Points If: You plan to stay in the home and keep the same mortgage for many years beyond the break-even age. For example, if you plan to stay for 15-30 years, buying points guarantees tens of thousands of dollars in net interest savings.
- Avoid Points If: You plan to sell the home, refinance the mortgage, or pay off the loan before your break-even month. For example, in a high-interest-rate environment where refinancing is highly likely in 2-3 years, prepaying for points is usually a waste of cash.