Are discount points worth it?
Points are prepaid interest. Whether they pay back depends on how long you keep the loan.
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Educational estimates only. Not financial, tax, or lending advice.
Should I buy discount points on my mortgage?
Points are prepaid interest: one point costs 1% of the loan amount and buys a lower rate. They pay back only if you keep the loan past the recovery month — the cost divided by the monthly saving. Sell or refinance before then and the money is gone.
What is a discount point?
A payment made at closing to buy a permanently lower interest rate. One point costs 1% of the loan amount.
Discount points are prepaid interest. You hand the lender money now, and in exchange every payment for the life of the loan is smaller. On a $400,000 loan, one point is $4,000.
What a point buys varies. A quarter of a percentage point per point is the figure most commonly cited, but it moves with the lender, the product and the day, so the only reliable version is the one written on your own Loan Estimate.
How do I know if points pay for themselves?
Divide what the points cost by what they save each month. That is the recovery month.
Points cost $4,000 and lower the payment by $60, and the recovery period is roughly 67 months. Keep the loan past that and the points were profitable. Sell, refinance or pay the loan off before it, and the money is simply gone.
So the question is never whether points are good value in the abstract. It is whether your holding period is longer than the recovery period, which makes this the same structural test as a refinance break-even: an upfront cost measured against a monthly saving over a horizon you choose.
When are points a good idea?
Long holds, and cases where somebody else is paying.
- You are confident you will stay a long time. A recovery period of five or six years is comfortably beaten by a fifteen-year hold, and the saving continues for every year after that.
- A seller or builder credit is funding them. Where the concession is paying for the buydown, the recovery arithmetic changes completely, because the upfront cost is not yours.
- Rates are expected to stay high. Points are worth least when you are likely to refinance out of the loan soon, and most when there is no better rate to move to.
When are points the wrong move?
Short holds, thin reserves, and any case where the cash has better work to do.
If there is a reasonable chance of selling or refinancing inside the recovery period, points are a bet against your own plans. The same cash applied to the balance, or simply kept as a reserve, does not evaporate when the loan ends early.
Points also compete with a larger down payment. More down means a smaller balance, and it may take you past the threshold where mortgage insurance stops applying — which can be worth more per dollar than the rate reduction.
Why do points make the APR higher than the rate?
Because APR is designed to include them, and that is what makes it useful here.
The note rate is the rate on the loan. The annual percentage rate folds in the fees, points included, and expresses the whole cost as one rate. A loan with points therefore shows an APR above its note rate.
Comparing two offers on note rate alone hides exactly the difference points create. Comparing on APR surfaces it — with the caveat that APR assumes you keep the loan for its full term, which is the assumption the recovery period exists to question.