Mortgage rates are hovering near two-decade highs, and lenders are dangling a tempting option in front of every buyer: pay extra upfront to knock your interest rate down.
It's called buying points, and whether it saves you money or quietly drains your wallet depends on one number most people never calculate.
One discount point costs 1% of your loan amount.
On a $400,000 mortgage, one point runs $4,000 and typically shaves about 0.25% off your rate.
Two points cost $8,000 and might drop you from 7% to 6.5%.
The appeal is obvious — a lower rate means a smaller monthly payment for the next 30 years.
That $8,000 has to be recouped through monthly savings, and at current spreads, the math usually points to a breakeven window of five to seven years.
If you sell, refinance, or move before that mark, you've handed the lender thousands of dollars for nothing.
The breakeven calculation itself isn't complicated.
Divide your total points cost by your monthly savings.
Pay $6,000 in points to save $75 a month?
That's 80 months — nearly seven years — before you're ahead.
Your lender can run this, but plenty of loan officers won't volunteer it unless you ask directly.
Points on a home purchase are generally deductible in the year you pay them, which softens the sting, but the standard deduction is now high enough that many buyers get no benefit at all.
And points paid on a refinance must be spread across the loan's life.
No-points loans, sometimes called par-rate mortgages, keep cash in your pocket at closing.
That money can cover moving costs, an emergency fund, or a higher down payment — which itself can eliminate mortgage insurance and lower your payment.
For buyers stretched thin on cash, this flexibility often matters more than a slightly lower rate.
If rates fall in the next couple of years, you'll likely refinance regardless of what you paid upfront — and your points vanish into the old loan.
Paying for points is essentially a bet that you'll stay put and rates won't drop.
That's a bet plenty of homeowners lost in 2020 and 2021.
A reasonable middle path: ask your lender to quote both scenarios side by side, in writing, with the breakeven month spelled out.
If you're confident you'll stay past that date and have cash to spare, points can make sense.
If your timeline is fuzzy, keep the money.
One more rule that gets ignored: never drain your savings to buy points.
A mortgage is a long game, but a broken furnace, a layoff, or a medical bill doesn't wait for your breakeven date.
Cash on hand is worth more than a quarter-point in most American households right now.
Our take: points aren't a scam, but they're oversold to buyers who won't stay long enough to win.
Run the breakeven math yourself, get both quotes in writing, and treat the decision as a timeline question, not a rate question.
Final Thoughts
For most people planning to move within five years, keeping the cash is the better deal.