Mortgage Points: Prepaying Interest and the Break-Even That Decides It

A discount point costs 1% of the loan and buys a permanently lower rate — a good deal if you keep the loan long enough, a donation to the lender if you do not. The break-even math, and the questions to ask before paying.

At closing, lenders offer a menu most borrowers have never studied: pay discount points up front — each point costing 1% of the loan amount — and receive a lower rate for the life of the loan. It is neither a scam nor a gift. It is a bet on how long you will keep the mortgage, and it has an exact break-even you can compute before betting.

The core arithmetic

Suppose one point on a $300,000 loan ($3,000) buys the rate down by 0.25%, trimming the monthly payment by about $50. Break-even: $3,000 ÷ $50 = 60 months. Keep the loan past five years and every month after is profit; sell or refinance sooner and the unrecovered balance of that $3,000 stays with the lender. The entire decision compresses into one comparison — break-even months versus your honest expectation of keeping this loan.

Why "this loan" is the hard part

People reliably overestimate loan longevity. You might stay in the house a decade — but if rates drop meaningfully and you refinance in year three, the points die with the old loan. Points are therefore most attractive when rates are low (little room to refinance below you), for buyers with long, confident horizons; least attractive when rates are elevated and refinancing later is plausible, or when the horizon is uncertain — a starter home, a mobile career.

The details that change the answer

Buydowns are not linear. The rate reduction per point varies by lender and market — get the actual schedule, not a rule of thumb, and compute break-even per point. The second point often buys less than the first.
Points compete with your down payment. $3,000 toward equity may kill PMI months earlier; that alternative return belongs in the comparison.
Negative points exist. Lender credits — a higher rate in exchange for reduced closing costs — are the same bet reversed, and genuinely useful for cash-tight buyers with short horizons.
Points are usually deductible on a purchase mortgage, softening the upfront cost for itemizers.

The mortgage points calculator takes your actual quote — both rates, the point cost — and reports the break-even month, the lifetime saving if you hold, and the comparison a loan officer is unlikely to volunteer.

Mortgage Points: Prepaying Interest and the Break-Even That Decides It

The core arithmetic

Why "this loan" is the hard part

The details that change the answer

Run your own numbers

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