Are discount points worth buying?
A discount point is money paid at closing to lower your interest rate, typically costing one percent of the loan amount per point. Whether it pays off is a single calculation: divide the cost of the points by the monthly saving to get your break-even in months, then compare that against how long you realistically expect to keep the loan.
The break-even calculation
Take what the points cost you at closing. Divide by the amount your monthly payment falls. The result is the number of months before the points have paid for themselves.
Stay past that point and the points were worth buying. Sell or refinance before it, and you paid for a benefit you never collected. That is the whole analysis — everything else is detail.
What makes it more or less likely to pay off
Break-even periods on points frequently land somewhere in the region of several years, which puts a lot of weight on your plans:
- Buying a long-term home tilts strongly towards paying points.
- A starter home you expect to outgrow in a few years tilts against.
- If rates are unusually high, refinancing later becomes more likely, which shortens your real holding period and argues against points.
- If cash at closing is tight, that money often does more good as reserves than as a rate buy-down.
The other direction: lender credits
The trade runs both ways. Accepting a slightly higher rate can produce a lender credit that reduces your cash to close. For a buyer who is stretched on closing funds but comfortable on monthly payment, that can be the better trade — and it is the same calculation in reverse.
This is why a single quoted rate tells you so little. The rate and the closing cost move together, and the useful view is the whole ladder rather than one row somebody else picked for you.
Sources
We would rather you checked than took our word for it.
Related
Interest rate vs APR: what is the difference?
The interest rate determines your monthly principal-and-interest payment.
How much house can I afford?
Lenders decide what you can borrow using your debt-to-income ratio: your total monthly debt payments, including the new mortgage, divided by your gross monthly income.