Discount Points: A Deep Dive
A discount point is prepaid interest — one point equals 1% of your loan amount — paid at closing to permanently lower your interest rate. Whether points are smart comes down to a single break-even calculation.
The break-even that decides it
Divide the cost of the points by the monthly savings they buy. The result is the number of months to recover the cost. Keep the loan well past that point and the points pay off, saving you money for years. Sell or refinance before it, and you simply spent cash for a benefit you did not keep long enough to earn back.
When points make sense
- You will keep the loan for a long time — well past the break-even.
- You have the cash and prefer a lower long-term payment.
- You are confident you will not refinance soon.
When to keep your cash
- You may move or refinance within a few years.
- Your cash is more valuable as reserves or a larger down payment.
- You are stretching to close and need every dollar.
Points are the reverse of a lender credit. If you will keep the loan long, points lower your cost; if you will leave it soon, a lender credit that covers closing costs in exchange for a slightly higher rate is often the better trade. Match the choice to your time horizon.