Mortgage Points: Buying Down Your Rate Is a Break-Even
A lower rate, for a price
You’ve found the house and you’re signing the loan. The lender slides a menu across the table: take the rate as quoted, or pay discount points to buy it down. One point costs 1% of the loan, paid in cash at closing, and knocks roughly a quarter-percent off your rate. On a $400,000 mortgage, two points is $8,000 today — in exchange for a smaller payment every month for as long as you keep the loan.
It sounds like an easy yes: a lower rate means a smaller payment and less interest over the life of the loan. But there’s a catch hiding in the timing. You pay the whole cost now, while the savings come back slowly — a little each month. So the real question is the same one that decides renting versus buying:
How long must you keep the loan before the monthly savings repay what you paid up front?
The break-even is just division
The math is refreshingly simple. Buying points lowers your monthly payment by some amount — call it your monthly saving. The points cost you a fixed sum up front. The break-even is:
break-even (months) = up-front cost ÷ monthly saving
Pay $8,000 to save about $130 a month and you break even after roughly 61 months — a little over five years. Before that, you’ve spent more than you’ve gotten back: you’re underwater. After it, every month is pure profit, and the gap keeps widening for as long as you hold the loan.
Watch your net position cross zero
The simulator plots the running net position of paying for points — your accumulated savings minus the up-front cost. It starts below the line, in the red, by exactly the price of the points. Each month the lower payment chips away at that hole, until the line crosses $0 at the break-even and climbs into the black. The dot marks where you stand the year you’d leave: above the line means the points paid off, below it means they didn’t.
The “Break-even” card is the headline, and “Years you keep the loan” is the verdict: if you won’t keep the loan that long, the points cost you money.
Things worth trying
- Drag “Years you keep the loan” down to 2 or 3. Almost any amount of points loses money over a short horizon — you sell or refinance before the savings catch up. Points are a bet on keeping the loan.
- Now drag it out to 25. Given enough time, a lower rate compounds into real money, and the points look like a steal.
- Add more points. Each one costs more up front and saves more each month — but it also pushes the break-even out a bit, because you’re paying for diminishing rate cuts. More points is a stronger bet that you’ll stay put.
- Raise the loan amount. Bigger loan, bigger payment, bigger dollar saving from the same rate cut — the percentages don’t change, but the stakes do.
Why “the loan you keep” matters more than “the loan you sign”
Here’s the part most people miss: the average mortgage doesn’t last 30 years. People sell and refinance. The day you do either, your old loan is gone — and so is any future saving you were counting on to justify the points. That’s why points so often disappoint: buyers pay for a 30-year benefit and collect five years of it.
This is the same trap as the rent-vs-buy decision, where transaction costs punish a short stay. A rate buy-down is an up-front cost that only pays off if you hold the asset — the loan — long enough.
Refinancing is the same math, later
Everything here applies to refinancing, too. Refinancing replaces your loan with a new one at a lower rate — but it has its own closing costs, paid up front. The break-even is identical in spirit:
refinance break-even = closing costs ÷ the monthly payment reduction
If refinancing costs $5,000 and drops your payment $200 a month, you break even in 25 months. Keep the new loan past that and you’re ahead; sell or refinance again before then and you’ve lost money on fees. The “save now, pay later” of points and the “pay now, save later” of refinancing are the same lever pulled at different times.
A word on the other mortgage levers
Points are the cleanest example of the break-even, but they’re one of several ways the loan you sign differs from the rate on the billboard:
- Fixed vs adjustable (ARM). A fixed rate never changes; an adjustable rate starts lower (a “teaser”) and then resets — up or down — after a few years. An ARM is a bet that you’ll be gone, or that rates will fall, before the reset bites — explored in adjustable-rate mortgages.
- Extra principal payments. Paying a little more than required each month attacks the balance directly and can retire the loan years early — explored in loan amortization.
- The term. A 15-year loan has a higher payment but a much lower rate and far less total interest than a 30-year; a longer term lowers the payment by stretching out the interest.
Each is a knob on the same machine: trading up-front cost, monthly payment, and total interest against each other — and against how long you’ll actually keep the loan.
Key terms
- Discount point — cash paid at closing, conventionally 1% of the loan, to buy your interest rate down. The classic “pay now to save later” trade.
- Break-even — the point in time when accumulated savings finally equal the up-front cost. Before it you’ve lost money; after it you’re ahead. The central number in every buy-down decision.
- Buying down the rate — paying up front (via points) for a lower interest rate, and so a smaller payment and less lifetime interest.
- Refinancing — replacing your mortgage with a new one, usually to get a lower rate. Has its own closing costs, and so its own break-even.
- Closing costs — the one-time fees to originate a loan (lender, title, appraisal). Points are an optional closing cost you choose to pay.
Points are the simplest of the loan’s hidden levers — a clean break-even you can compute in your head. The same “how long will I keep it?” question shapes every other mortgage choice, from the fixed-vs-ARM decision to whether to refinance when rates drop.