Mortgage points vs no points
A discount point is 1 percent of the loan, paid at closing, for a lower rate. One point on a $400,000 loan is $4,000. Cutting 6.75 percent to 6.50 percent over 30 years saves $66.12 a month, so the points take 60.5 months of staying in the loan to recover in cash.
| Paying points | No points | |
|---|---|---|
| Cash at closing | $4,000 for one point on $400,000. $4,500 for 1.50 points on $300,000. | Zero extra for points. Other closing costs still apply. |
| 30-year \$400,000 sheet | Payment $2,528.27 at 6.50 percent. | Payment $2,594.39 at 6.75 percent. $66.12 a month more. |
| Cash-flow break-even | 60.5 months of staying in the loan. | No points to recover. Leave when you like on this score. |
| Interest to term, 30 years | $510,177.95. Saved $23,803.31 if you actually hold to term. | $533,981.26. |
| 15-year \$300,000 sheet | 1.50 points, $4,500, save $60.91 a month, break-even 73.88 months. | The higher 6.25 percent payment of $2,572.27. |
| What resets the clock | Refinancing. Un-recovered points leave with this loan. | A refinance is a new comparison, not a continuation of this one. |
On this page
Cash today against a smaller payment later
A discount point is prepaid interest. On $400,000, one point is $4,000. At 6.75 percent over 30 years the payment is $2,594.39. At 6.50 percent it is $2,528.27. The difference is $66.12 a month. Divide $4,000 by that saving and the cash-flow break-even is 60.5 months.
That count treats a month of saving in year five as worth the same as a month of saving today. A present-value test would lengthen the wait. This table uses the cash-flow test because that is the one a closing disclosure supports without picking a discount rate.
How mortgage points work is the long form. The mortgage points calculator is the identity.
Leave before break-even and the points have not paid for themselves
Points are recovered only while this loan is the one you are paying. Refinance in year three and the remaining un-recovered points are gone. The refinance break-even calculator is that second decision. Do not add the two break-evens. They are sequential, and the first one is truncated by the second.
This is educational material, not financial advice.
Worked examples
One point on a 30-year \$400,000 loan
Loan $400,000, 30 years. Rate 6.75 percent without points, 6.50 percent with one point. Cash cost, monthly saving, months to recover, interest saved if held to term?
- Points cost: , so $4,000.
- Payment at 6.75 percent: $2,594.39. At 6.50 percent: $2,528.27. Saving: $66.12 a month.
- Break-even: months.
- Interest to term without points: $533,981.26. With points: $510,177.95. Saved: $23,803.31.
The points cost $4,000, save $66.12 a month, and take 60.5 months of staying in the loan to recover in cash. Held to term, interest falls by $23,803.31.
1.50 points on a 15-year \$300,000 loan
Loan $300,000, 15 years. Rate 6.25 percent without points, 5.875 percent with 1.50 points.
- Points cost: , so $4,500.
- Payment without: $2,572.27. With: $2,511.36. Saving: $60.91.
- Break-even: months.
- Interest saved to term: $10,964.36.
The points cost $4,500 and save $60.91 a month, so they take 73.88 months to recover. Held to the 15-year term, interest falls by $10,964.36.
Zero points leaves the payment unchanged
The same $400,000 30-year loan at 6.75 percent, with 0 points and no rate cut. Confirm the identities collapse.
- Points cost is 0. Both rates are 6.75 percent, so both payments are $2,594.39.
- Monthly saving is 0, so there is no finite break-even month. Interest saved to term is 0.
Zero points cost $0, save $0 a month, and save $0 of interest. The lower-rate box has to actually be lower, or there is nothing to recover.
Common questions
Are points always worth buying?
Only if you keep the loan past the cash-flow break-even, and only if that cash would not have done more somewhere else. The table names the payment saving. It does not name the return the $4,000 could have earned.
What if the lower rate does not cut the payment?
Then there is no break-even. That is usually two rates in the wrong boxes, or a term that shortened enough to offset the rate cut.
Do lender credits work the same way?
Backwards. You take a higher rate and the lender pays cash toward closing. The break-even then asks how long you must stay for the higher payment to cost more than the credit you took.
Keep reading
This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.