Mortgage Points and Break-Even: When Paying Upfront May Help
Learn how discount points trade upfront cash for a potentially lower mortgage rate and how to estimate the break-even period.
What mortgage points are
Discount points are upfront charges paid in exchange for a rate offered by a lender. One point is commonly expressed as one percent of the loan amount, but the rate reduction associated with a point is not fixed and varies by lender, product and market.
The break-even idea
The simplest comparison divides the additional upfront cost by the estimated monthly payment savings. That produces an approximate number of months needed for cumulative savings to recover the upfront cost.
Why break-even is only a starting point
A simple break-even calculation does not capture the time value of money, taxes, opportunity cost, refinancing, early payoff or a home sale. If you expect to keep the loan for less than the break-even period, paying points may provide little benefit.
Compare the same loan assumptions
When comparing quotes, keep the loan amount, term, lock period and other assumptions consistent. Compare lender credits and points together with APR and total closing costs rather than focusing on a single rate.
Run multiple scenarios
Model the payment at each quoted rate and compare the difference. Consider a shorter and longer ownership horizon so you can see how sensitive the decision is to how long you actually keep the mortgage.
Educational information only. This article is not individualized financial, investment, tax or legal advice and is not a lender, issuer or investment offer. Review current disclosures from the relevant provider before making a decision.