Mortgage Points: When Buying Them Actually Pays

The first time a lender offered me points I asked what they were and he said it is like prepaying some of your interest. Which is true, and completely useless, and I nodded as though it had helped.

The version that helps: a point is a fee equal to one per cent of the loan, paid on the day you close, that buys a lower interest rate for as long as you hold the mortgage. On $320,000, one point is $3,200.

The same division as a refinance

Cost divided by monthly saving. If a point costs $3,200 and drops the payment by $52.32, you have your money back in month sixty-one.

Both rows break even a little past five years, within a month of each other. That is not a coincidence. Lenders build their pricing sheets so the break-even lands in roughly the same place regardless of how many points you take, which means the decision is never really how many.

It is one question. Will you still have this loan in five years?

The long tail, if you actually stay

Hold the full thirty years and one point on this example saves $52.32 across 360 payments, which is $18,835, against a $3,200 cost. A net $15,635 from money handed over on a single morning at the closing table.

That is a strong case for anyone who genuinely stays put. It also assumes you never refinance, never sell and never pay the loan off early, and most American mortgages do not survive anything like thirty years.

What kills the trade

• Selling. The day the house changes hands the remaining saving stops, and whatever you had not yet recovered is gone.
• Refinancing, which has the same effect and is considerably more likely than selling in any stretch where rates fall.
• Being short of cash at closing, because points compete directly with your deposit, and a bigger deposit can remove mortgage insurance, which is often worth more per dollar than a quarter point of rate.
• Paying the loan down faster than scheduled, which shortens the exact tail the point was bought to capture.

Ask for both quotes

When you request a rate, ask for the quote with no points and the quote with points, from the same lender, on the same day. Two Loan Estimates side by side, because rates move and a comparison across two days is not a comparison.

Then do the division yourself. Their sheet shows the rate and the cost. It will not show the month it breaks even, because that number belongs to your life rather than to their pricing.

Write it down as a date. If that date sits further out than the day you expect to move, skip the points and put the cash into the deposit instead.

While you have them on the phone, ask for the reverse deal too: a higher rate in exchange for a credit toward your closing costs. It is the same lever pulled the other way, and if cash at closing is the thing you are short of, it is sometimes the better half of the trade.

The tax question, briefly

Points can carry a tax treatment and it differs by situation. Points paid on a loan to buy your main home may be deductible in the year you pay them, if you itemise and the loan meets a list of conditions. Points paid on a refinance are generally deducted across the life of the loan instead, a little each year.

Those conditions are easy to fail without noticing, and whether any of it helps depends on whether you itemise at all. Ask a tax professional with your actual return in front of them, and do not let a deduction you have not confirmed move the break-even month.

One last thing before you assume the table applies to you. Ask the lender exactly what one point buys on your quote, today. A quarter of a percentage point is common, but it shifts with the loan type, the day and the lender's own pricing sheet, and a point that only buys an eighth has twice the break-even.