Discount Points Break-Even Analysis
Mortgage Capital · NMLS# 1859012 · Licensed Florida mortgage broker
Discount points let you pay cash upfront to lower your mortgage rate, but they only pay off if you keep the loan long enough to recoup the cost. One point typically costs 1% of the loan amount and lowers the rate by a fraction of a percent. The decision comes down to a simple break-even calculation.
For Florida buyers weighing limited cash against a lower payment, running the break-even before paying points keeps you from spending money you won't recover. Sometimes points are smart; often they're not.
How points work
A discount point costs 1% of your loan amount and lowers your interest rate by a set amount, often around an eighth to a quarter of a percent, depending on the lender and market.
Paying points raises your upfront cost in exchange for a lower monthly payment over the life of the loan.
Running the break-even
Divide the cost of the points by the monthly payment savings to find how many months until you break even. If you'll keep the loan well past that point, the points pay off.
If you might sell or refinance before break-even, you'd lose money on the points. A buyer planning to move in a few years usually shouldn't pay them.
When points make sense in Florida
Points work best for buyers who will stay put long-term and have cash to spare after reserving for insurance and repairs.
Compare paying points against putting the same cash toward a larger down payment, which can also lower your rate and remove mortgage insurance.
Frequently asked questions
What is a discount point?
It's an upfront fee, typically 1% of the loan amount, that lowers your interest rate by a fraction of a percent for the life of the loan.
How do I calculate the break-even on points?
Divide the cost of the points by your monthly payment savings. The result is how many months until you recoup the cost.
When should I not pay points?
If you might sell or refinance before reaching break-even, paying points usually loses money.
Is paying points better than a bigger down payment?
It depends. A larger down payment can also lower your rate and remove mortgage insurance, so compare both with your own numbers.