To determine if paying mortgage points is worthwhile, perform a breakeven analysis using APR. APR reveals the loan’s true cost by including points and fees. The breakeven point is the time (in months) it takes for monthly savings from a lower interest rate to offset the upfront cost of points. Paying points makes sense if you stay in the home beyond this breakeven period.
In this guide, we’ll demystify mortgage points, show you how APR reveals the true cost of a loan, and walk you through how to calculate your breakeven point to determine when — and if — paying points makes sense.
What Are Mortgage Points?
Mortgage points, also called discount points, are fees paid directly to the lender at closing in exchange for a reduced interest rate on your loan. It’s a form of prepaid interest that can result in long-term savings on your monthly mortgage payment.
Quick Breakdown:
- 1 point = 1% of the total loan amount
- Typically reduces your interest rate by 0.25%
- Paid upfront at closing
- Can be tax-deductible in some cases (consult a tax professional)
Example:
If you borrow $300,000, one point would cost:
- 1% of $300,000 = $3,000
If one point reduces your interest rate from 5.00% to 4.75%, your monthly payments would be lower over the life of the loan.
Why Do Borrowers Pay Points?
Paying points is essentially a trade-off between short-term costs and long-term savings. You spend more money upfront to reduce your interest payments over the life of the loan.
You Might Pay Points If:
- You plan to stay in your home for many years
- You want the lowest possible monthly payment
- You can afford to pay more at closing
- You are financing a large mortgage, where small rate changes create large savings
But before you decide, you need to understand how long it will take for the upfront cost of points to “pay off.” That’s where breakeven analysis and APR come in.
APR: The Bigger Picture
Most people look at the interest rate when choosing a mortgage, but that only tells part of the story.
APR (Annual Percentage Rate) reflects the total cost of borrowing, including:
- Interest rate
- Points paid
- Origination fees
- Some closing costs
Why APR Matters:
APR helps you compare loans apples-to-apples, even if their structures differ. It gives a truer picture of what you’ll actually pay over time.
Example:
| Loan Option | Interest Rate | Points Paid | Monthly Payment | APR |
| No Points | 5.00% | $0 | $1,610 | 5.00% |
| With 1 Point | 4.75% | $3,000 | $1,565 | 4.91% |
In this case, even though the upfront cost is higher, the loan with points has a lower APR — meaning it’s a better deal if you stay in the home long enough.
Understanding the Breakeven Point
What Is It?
The breakeven point tells you how long you need to stay in the home for the savings from the lower interest rate to outweigh the upfront cost of the points.
Simple Formula:
Breakeven (in months) = Cost of Points ÷ Monthly Savings
When Paying Points Makes Sense
- You plan to stay in the home beyond the breakeven point
- You want to minimize your monthly mortgage payments
- You have the cash available to pay upfront without depleting emergency savings
- You’re purchasing or refinancing at a fixed interest rate
- You’re in a high-income bracket and may benefit from the tax deduction on points
- You’re investing in a rental property and want to increase monthly cash flow
When Paying Points Does Not Make Sense
- You plan to sell or refinance in the near future (before breakeven)
- You’d rather conserve cash for repairs, renovations, or emergencies
- You’re taking out a short-term mortgage or an ARM (adjustable-rate mortgage)
- You’re unsure how long you’ll stay in the home
Additional Factors to Consider
1. Loan Size
The larger your mortgage, the more savings you’ll see from a lower interest rate. So, paying points may make more sense on a $500,000 loan than on a $150,000 loan.
2. Refinancing Plans
If you plan to refinance in a few years, you may not hit the breakeven point, making the upfront cost a sunk cost.
3. Current Interest Rate Environment
When rates are relatively low, locking in a lower rate with points may provide long-term peace of mind.
Tips for Homebuyers and Real Estate Investors
For Homebuyers:
- Make your decision based on how long you expect to own the home, not the size of the discount alone.
- Don’t forget to budget for moving costs, furnishings, and maintenance — you may prefer keeping your cash.
For Real Estate Investors:
- Consider how the lower payment improves net operating income (NOI)
- Paying points can improve cap rate and long-term cash flow, especially for buy-and-hold properties
Final Thoughts
Paying mortgage points can be a smart financial move, but only under the right circumstances.
By using APR as a comparison tool and calculating your breakeven point, you can make a clear, data-driven decision that aligns with your financial goals. Whether you’re trying to save on monthly payments, lock in a historically low rate, or increase long-term equity, understanding this trade-off empowers you.
