Mortgage lenders love to offer you a menu of choices, and one of the most confusing is whether to pay "points" upfront to lower your interest rate.
It sounds like a smart move — pay a little now, save a lot later.
But for a surprising number of buyers, it quietly backfires.
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 upfront to drop your rate from, say, 7% to 6.75%.
Divide that $4,000 by $65 and you get roughly 61 months — a little over five years — before you've recouped what you paid.
Move, refinance, or sell before then and you've essentially handed the lender free money.
That timeline matters more than ever right now.
With rates still elevated and lots of homeowners sitting on low-rate loans from 2020 and 2021, the average American stays in a home for about a decade, but that figure swings wildly by market.
In hot, fast-moving metros, plenty of buyers sell in three or four years.
So who should actually consider paying points?
Buyers who are certain they'll stay put long-term, have cash sitting in a savings account earning little, and plan to keep the loan without refinancing.
For them, points can function like a guaranteed return on that upfront cash.
Anyone stretching to cover the down payment and closing costs.
Borrowers who might refinance if rates drop.
First-time buyers who don't know how long they'll stay.
In those cases, keeping that cash as an emergency fund usually beats a slightly smaller monthly bill.
Some lenders offer "lender credits" — the reverse of points.
You accept a higher rate, and the lender covers some closing costs.
That's often the smarter play for cash-strapped buyers who'd rather not drain savings.
One more thing worth checking: whether the seller will contribute.
In a slower housing market, buyers have more room to negotiate, and asking the seller to cover points or closing costs can lower your payment without touching your own wallet.
Before you decide, ask your loan officer for a side-by-side Loan Estimate showing the monthly payment, total upfront cost, and five-year total cost for both options.
If a lender won't put that in writing, that's your answer. **Our take:** Points aren't a scam, but they're oversold to buyers who won't stay long enough to benefit.
Final Thoughts
Run the breakeven math for your own situation, and if you can't confidently say you'll be in that house past the breakeven month, keep your cash.