Should you buy points? Run the break even first

Every rate quote you receive contains a choice that rarely gets explained: you can pay money up front to lower the rate, take a higher rate in exchange for a credit toward closing costs, or sit in the middle. Lenders call the up front payment discount points. One point is one percent of the loan amount.

Whether points are worth it is not a matter of opinion. It is a break even calculation against how long you will really keep the loan.

The calculation

Take the cost of the points and divide it by the monthly payment savings. The result is the number of months before you are ahead.

Using the sample pricing on this site, a $1,000,000 loan at 6.250% has a principal and interest payment near $6,159. Paying one point, $10,000, brings the rate to 5.875% and the payment to about $5,917. The saving is $242 a month, so the break even lands at roughly 41 months.

If you will hold that loan for ten years, paying the point is clearly worthwhile. If you expect to refinance or move inside three years, it is not.

Three things the simple math misses

• Opportunity cost. That $10,000 could stay in reserves, which jumbo underwriting cares about, or stay invested.
• Tax treatment. Points on a purchase loan are often deductible in the year paid, while points on a refinance are usually amortised. Ask your CPA rather than your lender.
• Refinance probability. If rates are historically high when you buy, the odds that you refinance inside five years go up, which shortens your real holding period.

When a lender credit is the better move

The mirror image of points is a lender credit: a slightly higher rate that pays part of your closing costs. Buyers who are tight on cash at the table, or who expect to refinance within a couple of years, often come out ahead taking the credit.

On the sample pricing here, moving from 6.250% to 6.625% produces roughly a $4,100 credit and raises the payment by about $246 a month. That is a reasonable trade if the loan is short lived, and a poor one if you keep it fifteen years.

How I quote it

Every quote I send shows three columns: credit, market pricing and one point paid. Same loan, same day, three structures, with the break even printed next to each. Then you choose based on your plan rather than on which number looks smallest.

If you want to see your own version of that table, send me a scenario and you will have it the same day. The figures on this site are samples for a demo, but the method is exactly what I use on a live file.

Sample figures for illustration only. Not an offer to lend or a rate lock. Actual pricing depends on credit, loan amount, property, occupancy, term and the market on the day you lock.