Mortgage lenders are pushing a tempting offer right now: hand over extra cash at closing, and they'll shave your interest rate for the life of the loan.
It's called buying points, and with rates still hovering near 6.5% for a 30-year fixed, plenty of borrowers are asking whether it's worth it.
Points only pay off if you stay in the home long enough to break even, and most Americans don't.
One point typically costs 1% of your loan amount and knocks about 0.25% off your rate.
On a $400,000 mortgage, that's $4,000 upfront to save roughly $65 a month.
Divide the cost by the monthly savings, and you're looking at about 61 months, or just over five years, before you see a single dollar of benefit.
That breakeven math is where things get uncomfortable.
The average homeowner stays in a house for roughly eight to ten years, but first-time buyers often move or refinance much sooner.
If you sell or refinance at year three, you handed the lender thousands of dollars for nothing.
There's a second trap that catches people.
If you refinance later, the points you paid on the original loan vanish.
You don't get them back, and you may end up paying points again on the new mortgage.
That double hit can wipe out years of savings.
So when does buying points actually make sense?
If you've got a 15-year mortgage, plan to retire in the home, and have cash sitting in a savings account earning 4%, paying points can be a reasonable move.
Your effective return on that upfront money can beat what the bank pays you.
The no-points crowd has a different advantage worth considering: flexibility.
Keeping that $4,000 in an emergency fund or using it to pay down a credit card at 22% interest will almost always beat a 0.25% rate reduction.
High-interest debt first, points later, if ever.
Before you sign anything, ask your lender for two Loan Estimates side by side, one with points and one without.
The form has a section that shows total interest paid over five years, which makes the comparison brutally clear.
Lenders are required to give you this, but they rarely volunteer it.
Also check whether your lender is offering a temporary rate buydown instead.
Some sellers and builders are covering these now, and they lower your payment for the first year or two without you paying a dime.
That's free money, and it doesn't lock you into anything.
One more thing to watch: discount points are sometimes rolled into the loan balance rather than paid upfront.
That means you're financing your rate reduction and paying interest on it for 30 years.
Run the numbers carefully if that's the offer on the table.
The bottom line is that points aren't a scam, but they're also not the automatic win lenders make them out to be.
If you know exactly where you'll be in seven years, they can work in your favor.
Final Thoughts
If life might move you sooner, keep the cash and take the higher rate.