Mortgage rates hovering near 6% have a lot of buyers staring at their loan estimates, wondering whether to hand over extra cash upfront to knock that number down.
That upfront fee is called buying points, and the decision can swing thousands of dollars over the life of a loan.
One discount point typically costs 1% of your loan amount and shaves roughly 0.25% off your interest rate.
On a $400,000 mortgage, that's $4,000 out of pocket to drop your rate from, say, 6.5% to 6.25%.
The only question that matters is how long you plan to stay.
Divide the upfront cost by your monthly savings, and you get your break-even point.
In that example, paying $4,000 to save about $65 a month means you'd need to stay put for roughly five years just to get your money back.
Sell or refinance before then, and you've handed the lender a gift.
Points make the most sense for buyers who are certain they'll be in the home for the long haul and have cash left over after closing.
They make the least sense for first-time buyers stretching to cover a down payment, or anyone who might move within a few years for a job, a growing family, or a better school district.
Points paid on a purchase mortgage are often deductible in the year you pay them, while points on a refinance usually have to be deducted over the life of the loan.
That can change the math, so it's worth a conversation with a tax professional rather than a guess.
Lenders don't always make this easy to compare.
Some quote rates with points baked in, others quote the no-points "par" rate, and the two can look deceptively similar on a Loan Estimate.
Ask for both versions side by side in writing, then look at the total cost over five, ten, and fifteen years, not just the monthly payment.
One more thing worth checking: seller concessions.
In a slower market, some sellers will cover points as part of the deal, which lowers your rate without touching your savings.
It's a negotiating chip plenty of buyers forget to use.
If you're weighing points versus no points, run the break-even on your actual numbers before you sign anything.
A loan officer can produce the comparison in minutes, and it costs you nothing to ask. **Our take:** Points aren't a scam or a magic trick, they're a bet on how long you'll stay in one place.
Final Thoughts
If you're not confident about the next five years, keep the cash and take the higher rate.