Are Mortgage Points Worth It at 7.40%? The Honest Break-Even Math

What a point actually is

A discount point is prepaid interest: you pay 1% of the loan amount at closing, and the lender lowers your rate in return. The trade is usually quoted at roughly 0.25 percentage points per point, though the exact cut depends on your lender's rate sheet. On a $240,000 loan, one point costs $2,400. Two points cost $4,800 and typically shave about half a percentage point off the rate. The payment drops, and the upfront cost is paid back over time.

The break-even math at today's rates

Run the numbers on the week's 7.40% average: a $240,000 loan at 7.40% carries principal and interest of about $1,662 a month. Add one point for $2,400, drop the rate to about 7.15%, and the payment falls to roughly $1,621, a savings of about $41 a month. Divide $2,400 by $41 and the break-even lands near 59 months, about five years. Stay in the home and keep the loan past that point and the points pay for themselves. Sell or refinance before then and you paid for a discount you never used.

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When points make sense (and when they do not)

Points make sense when you plan to keep the loan well past the break-even point, when you have cash above your down payment and closing costs, and when the lower payment matters to your debt-to-income ratio. They rarely make sense when you expect to move or refinance within a few years, when the cash is your whole down payment reserve, or when you are only buying points because the payment illustration is scary. Run the break-even before you run the offer; five years is a long time to hold a loan you planned to outgrow.

The buydown alternative: 1-0, 2-1, and builder credits

A temporary buydown is a different tool with a similar-sounding name. With a 1-0 buydown, the rate is reduced by 1% for the first year and reverts to the full rate in year two; a 2-1 buydown cuts 2% the first year and 1% the second. The difference is funded up front, often by a seller or a builder as a concession. Instead of paying for a permanent discount you might not keep, you pay less when cash flow is tightest, right after moving, and the money comes out of the negotiation rather than your pocket. In San Antonio's new-construction market, buydowns and closing cost credits are the incentives builders use most.

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Questions to ask your lender before you decide

• Exactly how many points am I paying, and what is the rate without them? Ask for a side-by-side on the same day so the only difference is the points.
• What is my break-even month? Your lender can compute it on your actual loan amount, including whether a lender credit on the alternative quote changes the math.
• Is the discount a permanent rate reduction or a temporary buydown? The words sound alike, and the economics are completely different.
• What happens to my points if I refinance or sell early? Points are a sunk cost at closing, so know the answer before you write the check.
• Do I still have an emergency reserve after I pay points? Never trade your post-closing cushion for a lower rate.

Frequently asked questions