What Mortgage Discount Points Actually Are
One discount point equals 1% of the loan amount, paid at closing, in exchange for a lower interest rate. On a $400,000 loan, one point costs $4,000 upfront. The rate reduction per point varies by lender and market conditions but typically runs 0.25% per point. Some lenders offer 0.125% per point in high-rate environments; others offer 0.375% per point in competitive pricing situations. Always get the points-to-rate table in writing from each lender you quote.
Mortgage discount points cost and monthly savings — $400,000 loan from 7% base rate
| Points Purchased | Upfront Cost ($400K loan) | Rate Reduction | New Rate (from 7%) | Monthly P&I Savings |
|---|---|---|---|---|
| 0 points | $0 | — | 7.00% | $0 |
| 0.5 points | $2,000 | ~0.125% | 6.875% | $33 |
| 1 point | $4,000 | ~0.25% | 6.75% | $67 |
| 1.5 points | $6,000 | ~0.375% | 6.625% | $101 |
| 2 points | $8,000 | ~0.5% | 6.5% | $133 |
| 3 points | $12,000 | ~0.75% | 6.25% | $201 |
The Break-Even Calculation
Break-even is simple: divide the upfront cost by monthly savings. $8,000 upfront for $133/month savings = 60.2 months (5 years) to break even. If you stay longer than 5 years, you come out ahead. If you sell or refinance in under 5 years, you lost the unrecovered points cost. This is the calculation you must run before buying any discount points.
Break-even and 10-year net gain from buying discount points — $400,000 loan
| Points | Upfront Cost ($400K) | Monthly Savings | Break-Even Months | 10-Year Net Gain |
|---|---|---|---|---|
| 0.5 pts | $2,000 | $33/month | 60.6 months | $1,960 |
| 1.0 pts | $4,000 | $67/month | 59.7 months | $4,040 |
| 1.5 pts | $6,000 | $101/month | 59.4 months | $6,120 |
| 2.0 pts | $8,000 | $133/month | 60.2 months | $7,960 |
| 3.0 pts | $12,000 | $201/month | 59.7 months | $12,120 |
Points assume you keep the loan until break-even. If mortgage rates drop 1% in 2026 and you refinance, your unrecovered points cost is gone — lost. In 2025, with rates at cyclical highs and potential Fed rate cuts ahead, this is the key risk factor. Points made most sense when rates were rising; they are riskier when rates are expected to fall.
When Buying Points Makes Financial Sense
- You plan to stay in the home 7 or more years — safely past break-even with meaningful recovery margin
- Rates are at a cyclical high and you expect to stay regardless of future rate moves
- You have sufficient cash reserves and buying points does not weaken your emergency fund
- The lower payment provides meaningful monthly cash flow relief that changes your budget situation
- You are buying a forever home or in a low-mobility life phase (established job, family, community)
- The seller is offering to pay points as a concession — this changes the math entirely (free points are almost always worth taking)
When Buying Points Does Not Make Sense
- You might move or sell within 5 to 7 years — job changes, growing family, career mobility
- Rates are expected to decline — you would refinance before recovering the points cost
- You do not have cash for points without weakening your emergency fund or down payment
- The points money would earn 8%+ annually in tax-advantaged accounts (401k, IRA)
- You are already at the edge of affordability — preserve cash for the first year of homeownership costs
Seller-Paid Points: A Different Calculation
When a seller pays discount points as a concession, the break-even math completely changes. If the seller pays 2 points ($8,000 on a $400K loan), your cost is $0 and your savings are $133/month. The break-even is instantly achieved — any time you stay in the home, you are ahead. Seller-paid points are negotiated into the purchase contract and have limits (typically 3% of purchase price for conventional loans). In slower markets, asking for 1 to 2 seller-paid points on a $400,000 home ($4,000 to $8,000) is a reasonable negotiating position.
Seller-paid vs. buyer-paid points comparison
| Points Scenario | Your Upfront Cost | Monthly Savings | Break-Even | 2-Year Net |
|---|---|---|---|---|
| You buy 2 points | $8,000 | $133/month | 60 months | -$4,808 (before break-even) |
| Seller pays 2 points | $0 | $133/month | Immediate | +$3,192 by Month 24 |
| Hybrid: seller pays 1, you pay 1 | $4,000 | $133/month | 30 months | -$208 at Month 30 |
In a buyer's market or when a home has sat for 30+ days, ask the seller to contribute 1 to 2 points toward your rate buydown instead of reducing the price. The tax math can favor seller credits over price reductions: a price reduction saves you nothing in taxes, while lower interest reduces your taxable deductible interest. Consult your tax advisor on the net benefit.
Calculate Your Points Break-Even
Enter your loan details with and without points — find your exact break-even date and total savings.