The debate over mortgage points upfront vs lower rate savings is one of the most misunderstood decisions in home buying. Your lender slides over a worksheet showing two scenarios. In the first, you pay the quoted rate and move on. In the second, you hand over several thousand dollars at closing in exchange for a lower rate that will save you money every single month for the life of the loan. The math looks compelling—pay now, save later. Simple enough.
Except the decision isn’t simple at all. Mortgage points sit at the intersection of time value of money, opportunity cost, and the uncomfortable reality that you have no idea how long you’ll actually keep this mortgage. The calculation that looks like obvious savings on a lender’s worksheet can quietly become one of the most expensive mistakes of your home purchase.
The seductive logic of buying down your rate
A mortgage point costs 1% of your loan amount and typically reduces your interest rate by approximately 0.25%, though the exact reduction varies by lender, market conditions, and prevailing rates. On a $400,000 mortgage, one point costs $4,000 and might drop your rate from 7% to 6.75%. That quarter-point reduction saves roughly $67 per month on a 30-year loan. Divide $4,000 by $67 and you get a break-even point of about 60 months—five years.
If you stay in the home longer than five years, you win. Every month after that is pure savings. Over the full 30-year term, that single point could save you over $20,000 in interest.
This is the pitch, and it’s mathematically accurate as far as it goes. The problem is that it doesn’t go nearly far enough.
What the break-even calculation ignores
The break-even analysis treats your $4,000 as if it has no other purpose in life. In reality, money sitting in your bank account has options. That $4,000 could go into an index fund. It could beef up your emergency fund so you’re not one job loss away from disaster. It could cover closing costs without touching your savings reserves.
If you invested $4,000 at a 7% annual return instead of buying points, you’d have roughly $7,900 after ten years. Meanwhile, your point purchase would have saved you about $8,000 in mortgage interest over that same decade (assuming you kept the loan that long). The comparison is closer than the lender’s worksheet suggests.
But the investment scenario has something the points purchase doesn’t: flexibility. You can access that invested money if you need it. The money you spent on points is gone the moment you close. You can’t get it back if you lose your job six months later. You can’t tap it if your roof starts leaking.
The refinance trap
Here’s the reality that demolishes most point-buying logic: according to various industry analyses, the median tenure of a mortgage before payoff or refinance falls somewhere between four and seven years, depending on the data source and time period measured. Not because people live in their homes for only that long, but because they refinance, sell, or otherwise pay off the loan.
When you refinance, your existing mortgage disappears. Every dollar you spent on points vanishes into the ether. You start fresh with a new loan, often facing the same decision about whether to buy points all over again.
Think about the past two decades. Rates dropped dramatically after 2008, and anyone with a pulse refinanced to capture lower rates. Then rates rose, then they dropped again during the pandemic, triggering another refinance wave. The person who bought points in 2018 expecting to hold their mortgage for 30 years probably refinanced in 2021 when rates hit historic lows.
This isn’t ancient history. Rate lock decisions involve the same fundamental uncertainty—nobody knows where rates are headed. If rates drop 1% in three years, you’d be foolish not to refinance, and every dollar you spent on points would be wasted money.
When points actually make sense
Despite everything I’ve just said, there are scenarios where buying points is genuinely smart.
You’re certain you won’t move or refinance for at least 7-10 years. Maybe you’re buying your forever home in a place with no plans to change. Maybe you’re already at retirement age with no intention of relocating. The longer your timeline, the more likely points will pay off.
Your rate is already historically low. If you’re locking in at 4% during a market dip, the odds of refinancing to something better are slim. Points make more sense when you believe you’re near the floor.
You’re optimizing for monthly cash flow over wealth building. Some buyers need to squeeze every dollar out of their monthly payment to qualify for the loan or to have breathing room in their budget. If a lower payment is essential to your financial stability, points can be the right tool.
The seller is paying your closing costs. In some markets, sellers will cover closing costs up to a certain percentage of the purchase price. If you’ve negotiated seller-paid costs and have extra room, directing that money toward points costs you nothing out of pocket. Free rate reduction.
The scenarios where points become a trap
You’re stretching to afford this home. If buying points depletes your cash reserves, you’re trading rate savings for financial fragility. A lower interest rate won’t help you when your HVAC dies and you’ve got nothing in savings.
You might relocate for work. Job mobility kills point purchases. If there’s even a 30% chance you’ll move within five years, the math tilts heavily against points.
You’re buying in an uncertain market. If you think rates might drop significantly, or if you’re buying at what feels like a market peak, refinancing becomes more likely. Points don’t travel with you to a new loan.
You haven’t maxed out other closing priorities. Before buying points, make sure you’re not better served by putting that money toward a larger down payment to avoid PMI, or keeping it liquid for post-closing expenses.
A harder question: fractional points
Lenders don’t just offer whole points. You can buy 0.5 points or 0.25 points, adjusting how much you spend and how much rate reduction you get. This makes the decision more nuanced but also more tractable.
If you’re on the fence about points, consider buying a fraction. Half a point on a $400,000 loan costs $2,000 and might drop your rate by roughly 0.125%, though again this varies by lender. Your break-even point shortens, your upfront cost decreases, and you preserve more liquidity. It’s a middle path that reduces risk without abandoning the strategy entirely.
Some lenders also offer temporary buydowns rather than permanent rate reductions. A 2-1 buydown, for instance, reduces your rate by 2% the first year and 1% the second year before reverting to your full rate. This can make sense if you expect your income to rise or if a seller is willing to fund the buydown as a concession. But temporary buydowns are a different calculation entirely—they’re about cash flow timing, not long-term interest savings.
The comparison that matters most
Rather than agonizing over points in isolation, compare the total cost of your mortgage under different scenarios.
Scenario A: Zero points, 7% rate, $400,000 loan. Monthly payment: $2,661. Scenario B: Two points ($8,000 upfront), 6.5% rate, $400,000 loan. Monthly payment: $2,528.
The monthly savings in Scenario B: $133. Break-even: 60 months.
But now factor in opportunity cost. If you invest that $8,000 at 7% annually, it grows to approximately $11,200 after five years. Over the same five years, your point purchase saves you $7,980 in reduced payments. The investment wins by over $3,000.
At ten years, the investment grows to roughly $15,700. Your point savings total about $15,960. Now they’re nearly equal. Beyond ten years, the points finally pull ahead—but only if you haven’t refinanced.
This is the math nobody shows you. Points are a bet that you’ll hold your mortgage longer than most people actually hold theirs, while foregoing the guaranteed flexibility of keeping cash.
What your lender won’t emphasize
Lenders make money regardless of whether you buy points. In fact, they often prefer that you don’t—the higher interest rate generates more profit for them over time if they hold the loan, or they can sell a higher-rate mortgage at a premium.
But points also generate upfront revenue, and lenders are generally neutral about which choice you make. What they’re not neutral about is making the decision seem simpler than it is. That tidy break-even calculation on the worksheet serves their interest in closing the loan efficiently, not your interest in making the optimal financial choice.
Ask your lender what percentage of their borrowers who buy points actually keep their mortgages past the break-even point. They probably don’t track this, which tells you something about how much they care about whether points work out for you.
The decision framework
If you’re agonizing over points, here’s a simple heuristic:
-
What’s your realistic timeline? Not how long you hope to stay, but how long you’ll actually stay given career, family, and life volatility. Be honest.
-
What’s your post-closing liquidity? If buying points drops your savings below six months of expenses, don’t do it.
-
What’s the rate environment? If rates are elevated compared to historical averages, refinancing becomes more likely. If rates are near historic lows, points become more attractive.
-
What’s your opportunity cost tolerance? Can you stomach watching that money potentially grow faster in an index fund than it saves you in interest? If seeing that comparison would haunt you, factor it in.
If you answer honestly and still lean toward points, buy them. If the answer is murky, default to keeping your cash. Flexibility has value that doesn’t show up on a lender’s worksheet.
The broader context
This decision doesn’t exist in isolation. The choice between 15-year and 30-year mortgages involves similar trade-offs between monthly savings and total interest paid. The question of whether rate buydowns make sense in your specific situation depends on many of the same variables. Each mortgage decision cascades into others.
Points are neither inherently a trap nor inherently a deal. They’re a financial instrument that works brilliantly for some borrowers and badly for others. The difference isn’t luck—it’s honest self-assessment about timelines, risk tolerance, and what you actually plan to do with your money.
The lender’s worksheet wants you to see a simple equation: spend money now, save money later. The real equation has variables the worksheet doesn’t capture: how long you’ll stay, whether you’ll refinance, what else you’d do with that cash, and how much you value financial flexibility.
Before you decide on points, answer a harder question: When does paying more upfront for your home actually build wealth, and when does it just reduce your options? The same logic that guides down payment decisions—the trade-off between upfront cost and long-term benefit—applies directly to the points question. The answer depends on who you are, not on a break-even calculation.