The math
Mortgage points are a bet on how long you keep the loan.
A point lowers your mortgage rate for a price that you pay when the loan starts. Whether it pays depends on one number: how long the loan lasts. That is often shorter than the time that you keep the house.
What a point is
A discount point is a fee that you pay when the loan starts, for a lower interest rate. One point costs 1% of the loan. The Consumer Financial Protection Bureau says that the rate cut for each point depends on the lender, the loan and the market.
Our example uses a $400,000 loan for 30 years at 7.32%. That is the average 30-year fixed rate in the Freddie Mac survey of October 22, 2026. We assume that one point, which costs $4,000, cuts the rate by 0.25 percentage point, to 7.07%.
The usual test
The point lowers the monthly payment from $2,747.72 to $2,680.04. That saves $67.68 a month. Divide the cost by the monthly difference, and you get a break-even of 59 months.
That test leaves out one thing. The $4,000 has another use, and it has a sure return.
The fair test
You can put the $4,000 against the principal when the loan starts. Each dollar of principal that you pay off saves interest at the loan rate, 7.32%. That is the return that the point must beat.
So we compare two borrowers. One buys the point and pays the monthly difference against the principal. The other pays $4,000 of principal when the loan starts. Then we ask who is ahead when the loan ends.
| The loan ends after | Points against a payment of principal |
|---|---|
| 2 years | Points behind by $2,506 |
| 3 years | Points behind by $1,694 |
| 4 years | Points behind by $836 |
| 5 years | Points ahead by $72 |
| 7 years | Points ahead by $2,045 |
| 10 years | Points ahead by $5,438 |
| 15 years | Points ahead by $12,458 |
The point wins only after 60 months, which is 5 years. If the loan ends after three years, the point loses $1,694. At five years, the two choices are about equal.
The rate cut decides the answer
Lenders price points differently. The break-even changes a lot with the rate cut that one point buys.
| Rate cut for one point, in percentage points | Monthly saving | Usual test | Fair test |
|---|---|---|---|
| 0.125 | $33.92 | 118 months | 168 months |
| 0.25 | $67.68 | 59 months | 60 months |
| 0.375 | $101.27 | 39 months | 37 months |
When the cut is small, the usual test is too optimistic. The monthly difference is small, and the $4,000 of principal earns the loan rate all of that time. Get the rate with points and without points from your lender, and use the real numbers.
The loan ends sooner than the house
A sale ends the loan. A refinance ends it too. If rates fall enough to make a refinance worth it, you pay off the old loan, and the point no longer pays you.
Thus a point is a bet on two things. You must keep the house, and rates must not fall enough to make you refinance, for about 5 years. A payment of principal does not need either of those things. You keep its benefit whenever the loan ends.
What to do
Estimate how long this loan will last, not how long you will own the house. The CFPB says that points can be a good choice if you plan to keep the loan for a long time.
Ask for the rate with and without points. Then calculate the fair break-even with the real rate cut.
If you are not sure, pay principal instead. It gives you the loan rate as a sure return, and you keep it if you sell or refinance.
Keep your emergency cash first. Money in the house is hard to get back. Our essay on where to keep cash explains the reserve.
What this leaves out
The model does not include taxes, other costs of the loan, lender credits or mortgage insurance. It assumes that you use each monthly difference to pay principal. A borrower who spends the difference gets less from the point.
Sources
- Freddie Mac, Primary Mortgage Market Survey, for the average 30-year fixed rate of 7.32% on October 22, 2026.
- Consumer Financial Protection Bureau, What are discount points and lender credits, for the cost of a point, the rate cut and the advice on how long you keep the loan.