How it works
Mortgage discount points are prepaid interest: each point costs 1% of the loan at closing and buys a permanently lower rate, converting upfront cash into reduced monthly cost for as long as you hold the loan. The entire decision compresses into one number — the breakeven month, where accumulated payment savings finally repay the upfront outlay — and one honest input: how long you will realistically keep the loan, which is rarely thirty years given median tenures under a decade. This calculator performs that compression. It prices your points (two points on $380,000 is $7,600), applies your lender's rate-reduction schedule (commonly 0.25% per point, with diminishing returns past two), recomputes the payment at both rates, and divides cost by monthly saving to land the breakeven — around month sixty-one on the defaults. Stay seven years and the points finish roughly $2,900 ahead; leave at year four and they die unfinished, having converted liquid cash into a discount you never collected. Three nuances refine real quotes: seller-paid points change whose cash rides the breakeven; points are potentially deductible as prepaid interest, subject to itemization rules; and draining reserves to buy them converts a rate decision into a fragility decision, which no breakeven month repairs.
Formula
Breakeven months = (points × 1% × loan) ÷ (payment at base rate − payment at reduced rate)
Tips
- Buy points only with money that would otherwise sit idle past the breakeven.
- Past two points, per-point reductions shrink — interrogate the lender's grid.
- Ask for seller-paid points in buyer's markets before paying your own.
- Points on a refinance must be amortized for deductions; purchases differ — ask a pro.
- If tenure is uncertain, negative points (lender credit, higher rate) flip the logic.
Frequently asked questions
- Are mortgage points worth paying?
- Only past the breakeven. Two points costing $7,600 on a $380,000 loan that saves $124 monthly breaks even around month sixty-one — so staying seven years nets roughly $2,900, while selling at year four forfeits about $2,600. Tenure honesty, not rate math, decides the question.
- How much does 1 discount point lower the rate?
- Typically 0.25%, though grids vary 0.125%–0.375% and compress at higher point counts. One point on $380,000 costs $3,800; at a full quarter-point saving of $62 monthly, breakeven lands near month sixty-one. Always demand the lender's specific per-point schedule rather than assuming the rule of thumb.
- What happens to points if I refinance or sell early?
- They evaporate. Points buy a rate attached to that specific loan; payoff by sale or refinance strands any unrecovered balance. Four years into our example, $2,600 of the $7,600 remains unrecovered — which is why points suit buyers with long horizons and penalize mobile ones, whatever the headline rate suggests.
- Are mortgage points tax deductible?
- Potentially. Points on a purchase of a primary residence are generally deductible in the year paid if itemizing and IRS conditions hold; refinance points must be deducted across the loan's life. Post-2017 standard-deduction increases mean many filers no longer itemize, making the deduction moot — verify your situation with a tax professional.
- Can the seller pay my mortgage points?
- Yes — seller-paid points are a negotiable closing cost, common in slow markets, and they shift the breakeven burden to someone else entirely: you collect the lower payment while contributing none of the upfront cash. In such deals taking maximum sensible points is almost free optionality on your monthly budget.