Loan Products · March 2, 2025
Mortgage Points Explained: Should You Buy Down Your Rate?
Mortgage points let you pay upfront to lower your interest rate. Here is how to calculate whether buying down your rate makes financial sense for your situation.
Mortgage points (discount points) are a way to prepay interest in exchange for a lower rate. One point equals 1% of the loan amount.
How Points Work
Each point typically reduces your rate by approximately 0.25% (the exact trade-off varies by lender and market).
Example on $350,000: 1 point = $3,500 upfront. Rate reduction: approximately 0.25%. Monthly savings: approximately $56/month.
The Break-Even Calculation
Break-Even = Point Cost divided by Monthly Savings.
$3,500 divided by $56 = 62.5 months (5.2 years).
Stay in the home longer than 5.2 years and buying points pays off. Sell or refinance sooner and you overpaid.
Lender Credits (Negative Points)
Accept a higher rate in exchange for the lender covering closing costs. Break-even is zero months — money in hand immediately. Cost: higher monthly payment for the life of the loan.
Smart when: short on closing cash, not planning to stay long-term, or expecting to refinance again if rates drop.
Points and Taxes
Mortgage points are often tax-deductible in the year paid for purchase loans. This benefit can meaningfully change the break-even math. Consult a tax advisor.
Never buy points without running the break-even first. HMS provides this analysis at no cost. Call 309-222-8286.