· Ronald Cepeda
Points can be a smart investment or wasted cash — it all comes down to how long you stay.
When you take out a mortgage, you'll often have the option to 'buy points' — paying an upfront fee to permanently lower your interest rate. One point typically costs 1% of your loan amount and lowers your rate by roughly a quarter percent, though the exact trade varies by lender and market.
The key concept is the break-even point. Buying points costs money today but saves money every month through a lower payment. Divide the upfront cost by your monthly savings, and you get the number of months it takes to recoup what you spent. Stay in the loan past that point, and the rest is pure savings.
Here's a simple example. If buying a point costs $4,000 and lowers your payment by $60 a month, your break-even is about 67 months — a little over five and a half years. Keep the loan longer than that, and buying the point was a good move. Sell or refinance sooner, and you likely lost money on it.
This is why your time horizon matters so much. If you plan to stay in the home for the long haul, points can be one of the best returns available on your cash. If you expect to move or refinance within a few years — or if rates are likely to fall — paying for points often doesn't make sense.
There's also a tax angle worth mentioning: discount points on a primary residence may be deductible, though you should confirm specifics with your tax advisor. And in some cases, like a 2-1 buydown, a seller may even pay for points on your behalf as a concession.
Points aren't inherently good or bad — they're a math problem with a personal answer. Before you decide, let's run your actual numbers side by side so you can see exactly where your break-even lands.