Are Mortgage Points Worth It? The Break-Even Math for Alabama and Florida Buyers
Share
The short answer: mortgage points are worth it only if you keep the loan past the break-even month. On a typical file that month falls around five years out. Here is how to find yours before you pay a dollar.
A lender quotes you two rates. One has no points. The other has a lower rate and a fee at closing. The question is whether the lower payment ever earns back the fee. The answer is arithmetic, and you can do it in two minutes.
What a mortgage point costs
One discount point costs 1 percent of your loan amount. On a $350,000 loan, one point is $3,500. In return, the lender lowers your interest rate. The size of the drop varies by lender, loan type and day. A quarter of a percentage point per point is a common illustration, but your quote is the only number that counts.
The break-even formula
Divide the cost of the points by the monthly savings. The result is the number of months until you come out even.
| Item | No points | 1 point |
|---|---|---|
| Loan amount | $350,000 | $350,000 |
| Rate (illustration only) | 6.500% | 6.250% |
| Cost at closing | $0 | $3,500 |
| Principal and interest payment | $2,212 | $2,155 |
| Monthly savings | None | $57 |
| Break-even | None | About 62 months |
The rates above are examples for the math. They are not current offers. Payments cover principal and interest only on a 30-year fixed loan. Taxes, insurance and mortgage insurance are extra.
Read the table this way. The $3,500 fee buys $57 a month. It takes 62 months, just over five years, to earn the fee back. After that, every month adds $57 to your pocket. At seven years you are ahead by about $1,300. At ten years you are ahead by about $3,400. If you sell or refinance in year three, you are behind by about $1,400.
Who should pay points
Points make sense when three things line up:
- You plan to stay well past break-even. A buyer who expects to keep the home and the loan for ten years or more has room to win.
- You have cash left after closing. Points compete with your down payment and your reserves for the same dollars. Spending savings on points can leave you short on the day the water heater fails.
- You do not expect to refinance soon. A refinance ends the loan, and the unrecovered points are gone.
Who should skip points, and take a lender credit instead
A lender credit runs the other way. You accept a higher rate, and the lender pays part of your closing costs. On the same $350,000 loan, a rate of 6.750 percent raises the payment to about $2,270. That is $58 more each month than the no-points loan. In exchange, the lender could credit up to $3,500 toward costs. You break even against the credit at about five years, so the credit wins if you leave sooner.
This is the logic behind buyers who are short on cash, expect to move within a few years, or plan to refinance when rates fall. Our guide to lender credits in Alabama and Florida walks through the trade, and the page on cost stacking shows how credits combine with seller concessions to cut cash to close.
Five questions to ask before you pay for points
- How much does each point lower the rate on my exact loan? Ask for the quote in writing, with the points and without.
- What is the break-even in months? If your lender cannot answer in one sentence, run the formula yourself.
- Are the points part of a rate lock, and for how long? A pricing change before the lock can move the numbers.
- Can the seller pay for the points? Many programs allow seller concessions toward points, up to program limits.
- What happens to my cash to close? Points raise it. Use the closing cost calculator to see the new total.
The tax question
Points paid on a home purchase may be deductible, and the rules depend on your situation. Ask a tax professional before you count the deduction in your math. Mountain Mortgage does not give tax advice.
How to compare two quotes fairly
Put both loan estimates side by side. Look at the interest rate, the points, the lender fees and the total cash to close. A lower rate with high fees can cost more than a higher rate with none. Our article on how to compare mortgage lenders in Alabama and Florida shows where fees hide, and the piece on closing costs in Alabama and Florida lists the line items. To see how a rate change moves your payment, try the monthly payment estimator.
Apply or get a quote and we will show you your own break-even, with points and without.
Frequently asked questions
Are mortgage points worth it?
They are worth it when you keep the loan longer than the break-even period, which is the cost of the points divided by the monthly savings. In the example above that is about 62 months. If you sell or refinance sooner, you lose money on the points.
How much does one mortgage point cost?
One point costs 1 percent of the loan amount. On a $350,000 loan, one point is $3,500. The rate reduction you receive for it depends on the lender and the market that day.
What is the difference between discount points and lender credits?
Discount points are paid at closing in exchange for a lower rate. Lender credits work in reverse. You accept a higher rate, and the lender pays part of your closing costs.
Can the seller pay for my mortgage points?
Often yes. Many loan programs allow seller concessions toward points and other closing costs, up to program limits. Ask your loan officer before you write the offer.
Are mortgage points tax deductible?
Points paid on a home purchase may be deductible, depending on your situation. Ask a tax professional. This article is not tax advice.
Examples use illustrative rates and are not current offers. Results vary. This is not a commitment to lend. Loan approval depends on credit, income, assets and property. Mountain Mortgage NMLS #2720886 | Paul Leara NMLS #2233772. Equal Housing Lender. Licensed in Alabama and Florida.