Complete guide
Reviewed July 2026Discount points are prepaid interest: you pay the lender a lump sum at closing in exchange for a permanently lower rate. One point costs 1% of the loan amount and typically buys a rate reduction of about 0.25 percentage points — though the exact trade varies by lender and market, which is why you must run your specific quote.
The entire decision reduces to one number: the break-even month. Divide the upfront cost of the points by the monthly payment savings. Keep the loan (without refinancing or selling) longer than that, and points were a good buy; exit sooner and they were a loss.
Enter your loan amount, the rate with and without points, the points cost and term above — the calculator returns your break-even point, monthly savings and total savings if you hold the loan to term.
The break-even formula
Points cost = Loan amount × points % ÷ 100 Monthly savings = Payment(base rate) − Payment(bought-down rate) Break-even months = Points cost ÷ Monthly savings
Both payments come from the standard amortization formula. The break-even is where cumulative savings equal the upfront cost — before it you're behind, after it every month is pure profit.
Worked example
- Loan: $400,000, 30-year fixed. Quoted 7.00% base, or 6.50% with 2 points.
- Points cost: $400,000 × 2% = $8,000.
- Payment at 7.00%: $2,661. Payment at 6.50%: $2,528.
- Monthly savings: $133.
- Break-even: $8,000 ÷ $133 ≈ 60 months = 5 years.
- Hold the loan 10 years: savings = 120 × $133 − $8,000 = $7,960 ahead. Sell or refinance at year 3: $8,000 − 36 × $133 = $3,212 lost.
Rule-of-thumb break-evens
Notice the pattern: at the standard 1-point-per-quarter-percent exchange rate, break-even lands near five years almost regardless of loan size. If your lender offers a better exchange (more rate cut per point), break-even shortens; a worse one lengthens it.
| Loan amount | Rate cut | Points cost | Monthly savings | Break-even |
|---|---|---|---|---|
| $200,000 | 6.75% → 6.50% | $2,000 | ~$33 | ~61 months |
| $300,000 | 7.00% → 6.75% | $3,000 | ~$50 | ~60 months |
| $400,000 | 7.00% → 6.50% (2 pts) | $8,000 | ~$133 | ~60 months |
| $500,000 | 6.75% → 6.25% (2 pts) | $10,000 | ~$165 | ~61 months |
When points make sense — and when they don't
Buy points when
- You're confident you'll keep the loan well past break-even — a long-term home in a rate environment you don't expect to improve.
- The seller or builder is paying: seller-paid points (common in buyer's markets and new construction) are nearly free rate reduction — take them.
- You have surplus cash after down payment, closing costs and emergency reserves.
- The lender's exchange rate is generous (e.g., 0.375% rate cut per point shortens break-even to ~3.5 years).
Skip points when
- You might refinance if rates fall — refinancing before break-even vaporizes the benefit, and in a high-rate market the odds of a refi within 5 years are substantial.
- You might sell within the break-even window (job mobility, growing family, starter home).
- The cash would deplete your emergency fund or could earn more elsewhere.
- A larger down payment would eliminate PMI — dropping mortgage insurance usually beats the same dollars in points.
Discount points vs origination points vs temporary buydowns
Discount points lower your rate for the life of the loan and are the subject of this calculator. Origination points are lender fees that buy nothing — negotiate them down. Temporary buydowns (2-1, 3-2-1) prepay a subsidy that lowers the rate only for the first years; they're a different product usually funded by sellers/builders, and their value is simply the subsidy amount, not a break-even decision.
How to use this calculator
- Get two quotes from the same lender on the same day: the base rate with zero points, and the rate with the points offer.
- Enter the loan amount, both rates, the points percentage and the loan term.
- Read the break-even month and compare it honestly against how long you expect to keep this loan — not the house, the loan.
- Check lifetime savings if held to term, but weight the break-even more heavily: few 30-year loans survive 30 years.
- If the loan might not last 1.5× the break-even period, skip the points.
Frequently asked questions
Glossary
- Discount point
- Prepaid interest costing 1% of the loan, exchanged for a permanent rate reduction.
- Origination point
- A lender fee equal to 1% of the loan that buys no rate reduction — pure cost.
- Break-even month
- The month when cumulative payment savings equal the points' upfront cost.
- Lender credit (negative points)
- A rate increase exchanged for reduced closing costs — points in reverse.
- Temporary buydown (2-1, 3-2-1)
- A prepaid subsidy lowering the rate for the first 1–3 years only.
- Rate lock
- A lender's guarantee of a quoted rate/points combination for a set period.
- APR
- Annual Percentage Rate — the rate including points and certain fees spread over the full term.
- PMI
- Private Mortgage Insurance, required on conventional loans above 80% loan-to-value.
Key takeaways
Points are a bet on loan longevity: cost ÷ monthly savings = the month you must survive to profit, typically near five years at standard pricing. Buy them for long holds, generous exchange rates, or when the seller pays; skip them when refinancing or moving is plausible, when cash is thin, or when the same dollars could kill PMI. Always price from a same-day 0/1/2-point grid — never a single quote.
Enter your two quotes above to get your exact break-even month — then ask yourself honestly: will this loan still exist that far in the future?