Points

Before you rely on it

What to check

Compute the break-even in months, then compare it honestly to how long you expect to hold the loan.

The common error

Where people go wrong with points

Paying points on a loan you will refinance in three years. The break-even is often five or more, and the calculation is rarely done before the paperwork is signed.

Worked through

Points in plain numbers

On a $300,000 mortgage, one point costs 1%, or $3,000. Suppose paying two points, $6,000, lowers the rate from 6.5% to 6.0%, an illustration only; the 30-year payment falls from $1,896 to $1,799, a saving of about $97.55 a month. Divide the cost by the monthly saving: $6,000 ÷ $97.55, and the break-even point is about 61.5 months, roughly five years. Sell or refinance before then and the points cost more than they save. Stay longer and they pay off. The decision depends on how long you will hold the loan, which is the one thing nobody knows at closing.

Easily confused

Points and its neighbours

Discount points are not origination points or fees. Discount points buy a lower interest rate and are paid up front. Origination points, or the origination fee, pay the lender for processing, and both are quoted as percentages of the loan, which can confuse; a lender credit is the opposite: you accept a higher rate in exchange for the lender paying some closing costs. Points are also different from percentage points in a rate change. The APR on the loan estimate helps you compare offers with different points.

In real decisions

Where points turns up

Buyers decide whether to pay points when they expect to keep the loan for many years. Those who might move or refinance sooner usually avoid them; lenders quote rate and point combinations, letting you choose. Comparing a few options with a break-even calculator makes the trade-off clear. Points on some mortgages may be tax deductible under specific rules, so check with a tax professional.

Know the edges

Where points stops being reliable

The break-even ignores the return you could earn by using the cash elsewhere. If rates fall you may refinance sooner than planned, wasting the points. The saving per point varies by lender and market. Some points are not refundable. Evaluate with the actual quotes and your own timeline, and ask for the loan estimate in writing.

Quick answers

What people ask about points

Are mortgage points tax deductible? In some situations, points paid to buy a rate on a home purchase may be deductible, with conditions. Rules differ by country and change. Ask a tax professional.

Are points worth it if I might move? If you may sell or refinance before the break-even point, points usually cost more than they save. Choose points when you expect to keep the loan for many years.

What is a lender credit? The opposite of points. You accept a higher rate and the lender pays some closing costs. It can suit short holding periods.