When points may or may not fit
The holding period and cash reserve usually matter more than the size of the advertised rate reduction.
| Situation | What to do next |
|---|---|
| Expected payoff before break-even | Keep the no-points offer in the comparison. |
| Stay well beyond break-even | Compare lifetime savings and opportunity cost. |
| Points weaken emergency reserves | Price the liquidity loss before buying down the rate. |
Start with two real quotes
Ask one lender to price the same loan with and without points at the same moment. Rate sheets move, so comparing quotes from different days creates a false break-even. Record loan amount, rate, points, lender credits and principal-and-interest payment.
Request paired quotes from one lender at the same time so market movement does not distort the comparison. Record the rate, points, lender credits, payment and cash to close for both versions.
Run the break-even test
On a $400,000 loan, one point costs $4,000. If it reduces the monthly payment by $85, the simple break-even is about 47 months. Selling or refinancing before then leaves part of the upfront cost unrecovered. Staying longer can make the buy-down worthwhile.
Divide the additional upfront point cost by the monthly principal-and-interest savings for a simple break-even. The result is a screening tool, not a guarantee, because it excludes the time value of cash and later loan changes.
Build a reliable cost comparison
Stress-test the answer
Repeat the calculation with a shorter holding period and include what the upfront cash could earn in savings. If paying points reduces emergency reserves or down payment enough to trigger mortgage insurance, the broader cost can outweigh the quoted rate reduction.
Test a move, refinance and early-payoff date before accepting the longer holding case. Also check whether paying points would weaken reserves, reduce the down payment or create another cost elsewhere in the mortgage.
Keep these three outcomes separate
One point equals 1% of the loan amount; its rate reduction is not fixed.
Simple break-even months equal upfront point cost divided by monthly payment savings.
A full decision should also account for opportunity cost, taxes and refinance probability.
Primary sources
- CFPB: Loan optionsOfficial reference ↗
- IRS: Home mortgage interestOfficial reference ↗
Answers to check before you act
What does one mortgage point cost?
One point costs 1% of the loan amount.
What if I refinance before break-even?
The remaining upfront point cost is not recovered through the projected monthly savings, so the buy-down may cost more overall.