How Mortgage Points Work: A Real-Dollar Case Study

One point costs 1% of your loan and typically trims about a quarter point off your rate. Whether that trade pays off depends on one thing: how long you keep the loan.

What a point actually is

A mortgage point, formally a discount point, is prepaid interest. One point costs 1% of the loan amount, paid at closing, and in exchange the lender lowers your interest rate, commonly by about 0.25%, though the exact trade varies by lender and by day. You are not buying a different loan; you are paying part of its interest bill upfront in exchange for a smaller bill every month after. Points can also run the other direction: accepting a higher rate can earn lender credits that offset closing costs, which is how no-cost loans are built.

The case study: one loan, three prices

Take a $350,000 loan and three rate offers, using illustrative pricing, not live rates:

• 0 points at 6.75%: Payment about $2,270 a month. Upfront cost for the rate: $0.
• 1 point at 6.50%: $3,500 at closing. Payment about $2,212 a month, roughly $58 less than the zero-point offer.
• 2 points at 6.25%: $7,000 at closing, with a payment saving of about $180 a month compared with the 6.75% offer on typical lender pricing.

The 2-point deal is the cleanest illustration of how break-even works. Two points on $350,000 cost $7,000, and cutting the rate from 6.75% to 6.25% saves about $180 a month. Divide $7,000 by $180 and the break-even is about 39 months. Keep the loan longer than 39 months and the points were a profitable purchase. Sell or refinance before then and you bought savings you never collected. Test your own loan size and quotes with our mortgage points calculator.

Why the break-even is the whole game

Points reward one behavior: staying put. The average homeowner moves or refinances well before 30 years, which is why points lose money for so many buyers despite looking clever at the closing table. Ask yourself the uncomfortable question honestly: will this exact loan still exist in five years? If there is a job move, a growing family, or a likely refinance in your future, the zero-point offer usually wins. If this is your long-term home and your cash reserves stay healthy after closing, points can be one of the few guaranteed-return purchases in the whole transaction, effectively earning the rate difference on money you would otherwise hand the lender slowly.

Points on a refinance deserve extra suspicion

On a refinance, points reset a break-even clock you may have already paid for once on the original loan. Serial refinancers who buy points each time are stacking prepaid interest on loans that never live long enough to repay it. If you refinance, run the combined math in our refinance calculator and count points as part of the closing costs, because that is exactly what they are.

Negotiation and fine print

• Points are negotiable and priced differently by every lender; get the full menu of rate-and-point combinations in writing, the Loan Estimate shows them clearly.
• Fractional points exist. You can buy 0.5 or 1.375 points if that fits your cash position.
• Seller concessions can sometimes pay for points in a purchase, which changes whose money is at risk.
• Compare offers by total cost over your expected holding period, using our mortgage comparison calculator, rather than by rate alone.

A quick tax note

As a general rule, points paid on a loan used to buy your main home are often deductible in the year paid, while points on a refinance are usually deducted gradually over the life of the loan. This is general information, not tax advice; the details depend on your situation, so confirm with a tax professional before counting on the deduction.

The bottom line

Points are a simple trade dressed in confusing language: cash today for savings spread over years. Compute the break-even in months, be brutally honest about how long you will keep the loan, and only buy points when the calendar is clearly on your side.