Buying points vs. taking the higher rate
Scenario. A $400,000 loan. No-points rate 7.26%; buying 2 points ($8,000) lowers it to 6.76%.
| No points, higher rate | Buy 2 points, lower rate | |
|---|---|---|
| Interest rate | 7.26% | 6.76% |
| Upfront cost | $0 | $8,000 |
| Monthly payment (P&I) | $2,731 | $2,597 |
| Monthly saving from points | — | $134 |
| Break-even on the $8,000 | — | 5 yr |
Run “No points, higher rate” → · Run “Buy 2 points, lower rate” →
How points work
One discount point costs 1% of the loan amount and typically lowers the rate by about 0.25 percentage points. It is prepaid interest: you hand the lender cash now in exchange for a smaller payment every month. Divide the cost by the monthly saving and you get the break-even — the month after which points are pure profit.
When buying points makes sense
- You will keep this exact loan well past the break-even month — no move, no refinance. Break-even is often five to eight years.
- You have the cash and buying points will not shrink your down payment below 20% or drain your emergency fund.
- Rates are relatively high and you expect to hold, so refinancing to a lower rate later is unlikely.
Frequently asked questions
What is a mortgage point worth?
One point costs 1% of the loan and usually cuts the rate about 0.25 points. On a $400,000 loan that is $4,000 for roughly $60–$70 a month of payment savings, a break-even of five to seven years.
Are points tax deductible?
Points on a purchase of your primary home are generally deductible in the year paid if you itemize; points on a refinance are usually deducted over the life of the loan. Rules have limits — check current IRS guidance.
Should I buy points or make a bigger down payment?
A bigger down payment reduces the loan and can remove PMI, which is often the higher-value use of cash. Consider points only after you are at 20% down with reserves intact.
Related calculators
Terms: Discount point , Annual percentage rate (APR) , Interest rate (note rate) , Rate lock