Discount points are prepaid interest. You hand the lender money at closing and they lower your rate for the life of the loan. One point costs 1% of the loan amount and typically buys somewhere around a 0.25% rate reduction, though the exchange rate varies by lender and market.
Whether it’s a good deal comes down to a single calculation and one honest guess.
The break-even
Say you’re borrowing $350,000.
- Without points: 6.75%, payment about $2,270/month.
- With one point ($3,500 upfront): 6.5%, payment about $2,212/month.
You save $58 a month. Divide $3,500 by $58 and you get roughly 60 months.
Five years. Stay in the loan longer than that and the points paid off. Sell or refinance sooner and you lost money.
That’s the entire analysis. Cost of points divided by monthly savings equals the number of months you must keep the loan.
The honest guess
How long will you actually keep this specific loan? Not this house — this loan.
Those are different questions, and it’s the one people get wrong. You might live in the house for twenty years and refinance twice in the first six. Every refinance kills the points you bought on the old loan.
So if rates are historically high and there’s a reasonable chance you’ll refinance when they fall, points are a bad bet even if you love the house. If you’ve locked in a rate you’re unlikely to beat, the loan probably survives.
Things that shift the math
Opportunity cost. That $3,500 could go into the down payment, an emergency fund, or investments. The break-even above ignores what the money would have earned elsewhere, which pushes the true break-even out further.
Tax deductibility. Points on a primary residence purchase are often deductible, sometimes fully in the year paid. This only helps if you itemize, which most people no longer do. Worth asking a tax professional about rather than assuming either way.
Cash constraints. If buying points means closing with nothing in reserve, don’t. Liquidity is worth more than 0.25%.
Negative points exist too
The reverse trade — lender credits — gives you a higher rate in exchange for the lender covering some closing costs. Same math, flipped.
That’s often the better move if you’re short on cash, or if you genuinely expect to refinance soon. Take the credit now, deal with the rate later.
Make lenders quote both
When comparing loan estimates, insist on seeing each lender’s pricing with zero points. Otherwise you’re comparing a 6.5% quote that cost $3,500 against a 6.6% quote that cost nothing, and the lower number looks better while being worse.
The Loan Estimate form is standardized precisely so you can line these up. Use it. Page two shows exactly what you’re paying for the rate.