Two home shoppers can sign nearly identical mortgage offers and pay wildly different amounts over 30 years, all because of one small line item buried in the paperwork.
It's called discount points, and it's one of the most misunderstood choices in American homebuying.
One discount point costs 1% of your loan amount and typically lowers your interest rate by about 0.25%.
On a $400,000 loan, that's $4,000 upfront to shave roughly a quarter point off your rate.
Pay none, keep the cash and accept a higher rate.
The question is whether that upfront money ever pays for itself.
Say you're comparing a 6.5% loan with no points against a 6.25% loan with one point.
The lower-rate version saves you about $60 a month on a $400,000 loan.
Divide your $4,000 by that $60, and you're looking at roughly 66 months, or five and a half years, just to break even.
Stay in the home longer than that, and buying points puts you ahead.
Sell, refinance, or move before then, and you handed the lender thousands of dollars for nothing.
How long you plan to keep the loan matters more than how long you plan to keep the house.
If rates drop two years from now and you refinance, the points you paid on the original loan are gone.
You don't get them back, and you don't get to carry them to the new mortgage.
Points paid on a loan used to buy or improve your primary residence are often deductible in the year you pay them, though rules get murkier on refinances.
That can soften the sting, but it shouldn't be the reason you write the check.
Talk to a tax professional about your situation rather than assuming.
Cash is the quiet factor nobody talks about.
Every dollar you sink into points is a dollar you can't use for a bigger down payment, an emergency fund, or the new roof you'll probably need.
Buyers who drain their savings to buy down a rate sometimes find themselves putting moving costs and repairs on a credit card at 20% or higher.
Ask your lender for a loan estimate showing both scenarios side by side, then calculate your own break-even month.
If you're confident you'll be in that loan well past it, points can be a reasonable buy.
If your life or the rate environment might change sooner, keeping the cash tends to win.
One more thing: points are negotiable in some cases, and lender credits work in reverse.
You can accept a slightly higher rate in exchange for the lender covering some closing costs, which helps buyers who are short on cash today and plan to refinance later. **The bottom line:** Points are a bet on your own timeline, not a guaranteed win.
Run your break-even number before you sign anything, and be honest about how long you'll actually stay put.
Final Thoughts
For most buyers with shaky plans or thin savings, keeping the cash is the smarter play.