What One Point Actually Buys
A discount point is prepaid interest: one point costs 1% of the loan amount and buys the note rate down, most often by 0.25% on a 30-year fixed grid. On the default $400,000 loan, one point at closing costs $4,000 and moves a 6.75% quote to 6.50%. The required payment drops from $2,594.39 to $2,528.27, which is $66.12 back in your pocket every month the loan survives.
Points sit on the lender's rate sheet next to the par rate — the rate you get at zero points. Everything above par is bought with points; everything below par is paid to you through lender credits. Because the trade is mechanical, you can price it before committing, and a mortgage calculator lets you carry the comparison through to the full payment picture including taxes and insurance on the loan side.
On the surface the trade scales cleanly: two points cost $8,000 and buy 6.25%, three cost $12,000 and buy 6.00%. But the honest comparison is not points versus no points — it is this $4,000 versus every other use of the same $4,000, which is the question the rest of this page works through.
The Break-Even Math
The core formula is one division: break-even months = points cost ÷ monthly savings. On the default inputs, $4,000 ÷ $66.12 = 60.5 months, right at the five-year mark. Every payment after month 61 is profit on the trade, and every payment before it is still digging out of the upfront cost.
Because both the cost and the savings scale with the balance, loan size barely moves break-even. The same 1-point, 0.25% trade on a $200,000 loan and a $600,000 loan both break even at about 60 months. What does move it is the rate cut itself, quoted in basis points — 25 bps per point is the classic grid — and a basis point calculator helps translate quotes when two lenders quote cuts of 0.25% versus 0.375%.
The rate level matters too. The identical 0.25% cut saves $58.98 a month on a 4.5% base rate (break-even 67.8 months) but $69.41 on an 8.0% base (57.6 months), because payments are more sensitive to rate when rates are higher. Points pay back slightly faster in high-rate environments — one reason buydowns get popular when rates climb.
How Long Will You Actually Keep This Loan
Points only pay if the loan lives past break-even, and 30-year loans rarely act their age. Commonly cited industry analyses put the typical life of a US mortgage well under ten years — often five to seven — because refinancing waves, job moves, and home upgrades retire loans early. The default scenario nets about $1,554 ahead over a 7-year hold, loses $1,620 over a 3-year hold, and lands within $33 of a wash at exactly 5 years.
Adjustable-rate mortgages make the holding question sharper. A 5/1 ARM fixes the bought-down rate for only five years, and if the adjustment pushes you to refinance, the clock stops right around break-even. Model the realistic exit before buying points on an ARM — the ARM mortgage calculator shows what happens after the fixed period ends, and a mortgage comparison calculator frames the full two-loan decision.
Be honest with the hold-years field rather than optimistic. A borrower who says ten years because the payment math works, but whose neighborhood, employer, or family plan says four, is making a $4,000 bet against their own base rate. Run the tool at your pessimistic hold estimate as well as your hopeful one; the gap between those two net results is the real risk you are taking.
Points, Negative Points, and Lender Credits
Lender credits are points in reverse. Accept a rate 0.25% above par — 7.00% instead of 6.75% on the default loan — and the lender hands you $4,000 at closing. The cost arrives later: the payment rises $66.82 a month, which compounds to $5,612.68 extra paid over seven years. That is a loan at whatever rate the grid implies, and it is priced into your mortgage for decades unless you refinance out.
Credits shine when closing cash is the binding constraint — the difference between bringing $9,000 and $5,000 to the table can decide whether the purchase closes at all. Points shine when your horizon is long and you have cash left after the down payment. The crossover for the default grid is about 60 months, the same break-even as the points trade itself, because the two trades are mirror images of each other.
If you are juggling full offers from two lenders — different rates, fees, points, and credits — a home loan comparison tool prices both sides over one holding period. Use this page to understand the points decision inside a single offer; use the comparison to decide between offers.
Taxes, APR, and the Fine Print
Points on a purchase loan for a primary residence generally qualify as prepaid interest under IRS Publication 936 rules, deductible in the year paid — which can soften the real cost of the default $4,000 by your marginal tax rate. On a refinance the same $4,000 is typically deducted ratably over the loan's life, about $11.11 a month on a 30-year note, a much weaker benefit. Confirm the specifics with a tax professional before counting the deduction.
APR was designed to fold points back into the cost of borrowing: the default points loan carries a 6.50% note rate but a 6.597% APR, while the no-points loan stands at 6.750% APR flat. The catch is that APR assumes you hold to maturity, so it flatters points on a 30-year horizon you may never reach. Run the numbers yourself with an APR calculator and remember the APR comparison embeds a holding assumption you should replace with your own.
Read the Origination Charges block on your Loan Estimate before assuming anything labeled a point is a discount point. Origination points compensate the lender for making the loan and buy nothing down; discount points are the prepaid interest this page prices. Also note that rate sheets move daily — a grid quoted Tuesday can be stale by Thursday, so date every quote you compare.
What a Lower Rate Does to Your Amortization Schedule
The first payment on the default no-points loan sends $344.39 to principal after $2,250.00 of interest. Buy the rate to 6.50% and the first payment sends $361.60 to principal after $2,166.67 of interest — $17.21 more equity from day one, on top of the $66.12 lower payment. The gap compounds: the bought-down balance runs permanently below the par-rate balance and pulls further ahead every month.
Over a full 30 years the totals tell the story. The no-points loan pays $533,980 in interest; the points loan pays $510,176 — a $23,803 reduction in interest, or $19,803 net after the $4,000 upfront cost. Trace the two schedules line by line with an amortization calculator, or price the lifetime cost of the rate difference with a mortgage interest calculator.
One subtlety: the lower rate also moves the month where principal finally exceeds interest earlier in the schedule, and every extra-payment dollar you ever make works harder against a smaller interest charge. A bought-down loan is not just cheaper to carry — it converts the same extra principal into faster equity growth for as long as you hold it.
The Same $4,000 as Extra Principal
The fairest comparison for points is not fantasy investment returns but the guaranteed alternative: putting the same $4,000 into the loan as extra principal. On the default 6.75% loan, a one-time $4,000 principal payment cuts about 11 months off the term and saves roughly $25,270 in lifetime interest — slightly more than the $23,803 interest cut from points on this grid, for the same cash.
The difference is in the mechanics. Extra principal earns exactly 6.75%, guaranteed, but the required payment never drops — you keep paying $2,594.39 with no monthly relief. Points buy a permanently lower required payment ($66.12 a month), which is flexibility extra principal cannot give. Model your own numbers with a mortgage extra payments calculator and compare it against the points scenario on this page.
A defensible middle path: skip points, keep the par rate, bank the $4,000, and direct it to principal only once your emergency fund is whole. You keep the cash liquid until the moment it converts to guaranteed return, and you avoid betting on a holding period you do not control.
Negotiating the Rate Sheet Like a Pro
Ask every lender for their full points-to-rate grid in writing — the par rate plus the price at 0.5, 1, 1.5, and 2 points. Real grids compress as you go deeper: a typical sheet shows 6.75% at par, 6.50% at 1 point, but only 6.375% at 2 points and 6.25% at 3. The first point bought 25 bps for $4,000 (break-even 60.5 months); the second bought just 12.5 bps for another $4,000 (break-even 122 months).
When your grid is non-linear, enter the average cut per point in this tool — 2 points for a total 0.375% cut means 0.1875% per point — and compare marginal points, not totals. The marginal price of each next eighth of a percent is where lenders differ most, and tolerance for repricing within a lock is negotiable more often than borrowers ask.
Two last flags before you sign. If there is a real chance you tap your home equity in the next few years and a cash out refinance calculator scenario is already on your whiteboard, points are dead weight — a refinance replaces the rate you paid to buy down. And if your state caps or taxes the credit side of the grid differently, price both directions before assuming credits are the fallback plan.