Mortgage Points Breakeven: How Long Until Buying Down Your Rate Pays Off

The loan officer says you can drop your rate from 6.75% to 6.25% by paying $8,000 up front. On a $400,000 loan over 30 years, that swap cuts your monthly payment by $130, so the naive breakeven is 62 months. The honest breakeven is longer, closer to 76 months, because the first years of the lower-rate loan build equity slightly slower than the payment savings suggest and because the $8,000 stops earning anything the day you hand it over. Here is the arithmetic, run all the way through.

Key points

• On a $400,000 30-year loan, two points ($8,000) buying 6.75% down to 6.25% cuts the monthly payment from $2,594.39 to $2,462.87, a saving of $131.52 a month.
• Dividing $8,000 by $131.52 gives 60.8 months, which is the number most lenders quote, and it ignores both the balance difference and what the $8,000 could have earned elsewhere.
• Counting the loan balance at each month, the two loans cost the same total by month 76, roughly six years and four months in, so selling or refinancing before then loses money.
• If the $8,000 would otherwise have sat somewhere earning 4% a year, breakeven pushes past month 90.
• Points are why the APR is lower than the note rate on a bought-down loan, and the CFPB explains that gap directly.

What exactly are you buying when you pay a point?

You are prepaying interest. One point is one percent of the loan amount, paid at closing, in exchange for the lender writing a permanently lower note rate on the same loan.

Meet Dana. She is closing on a house in March 2026 with a $400,000 fixed-rate 30-year mortgage. Her lender’s rate sheet offers two options that morning:

• Option A: 6.75%, no points, no lender credit.
• Option B: 6.25%, two points, meaning $8,000 due at closing.

That’s it. Same loan amount, same term, same lender, same everything else. The only difference is $8,000 now against a lower rate for as long as she keeps the loan.

The pricing isn’t arbitrary. The lender is selling the loan into the secondary market, and a 6.25% loan is worth less to a buyer of mortgage paper than a 6.75% loan of the same size. The $8,000 roughly covers that gap. Nobody is doing Dana a favour, and nobody is fleecing her either. It’s a price for a cash flow swap.

Dana carries through this whole article. Every number below is her loan.

How much does the payment actually drop?

The monthly principal and interest payment comes out of the standard amortization formula: P = L × r / (1 − (1+r)^−n), where L is the loan amount, r is the monthly rate, and n is the number of payments.

Option A, 6.75%: monthly rate 0.0675 / 12 = 0.005625, n = 360. Payment = $2,594.39.

Option B, 6.25%: monthly rate 0.0625 / 12 = 0.00520833, n = 360. Payment = $2,462.87.

Difference: $131.52 a month.

Half a percentage point on $400,000 is $2,000 a year of interest in year one, which is $166.67 a month. But Dana’s payment only drops $131.52. The gap is real and it matters later: the lower-rate loan pays down principal faster, so part of the interest saving is redirected into principal rather than showing up in her pocket. She isn’t losing that money. She’s just not receiving it as cash.

That distinction is the whole reason the simple breakeven is wrong in Dana’s favour, and I’ll come back to it.

What’s the number the lender quotes?

Cost divided by monthly saving. $8,000 ÷ $131.52 = 60.83 months, so a shade over five years.

You will see this number on nearly every points calculator, including the ones on lender sites. It isn’t a lie. It is genuinely the point at which Dana’s cumulative payment savings have returned the $8,000 in cash flow. If all you care about is monthly cash and you plan to hold the loan for 15 years, 61 months is a reasonable mental anchor.

It’s just not the number that answers “am I better off?”

Why does the true breakeven land later than 61 months?

Because Dana has to compare net worth, not cash flow, and the two loans have different balances at every point in time.

Think about what happens if she sells in month 60. Under Option A she has paid out $2,594.39 × 60 = $155,663.40 and owes some balance. Under Option B she paid $8,000 at closing plus $2,462.87 × 60 = $147,772.20, and owes a different balance. To compare fairly you add the remaining balance to the cash already spent, because the balance is what gets paid off out of sale proceeds.

Run the amortization to month 60.

Option A at 6.75%, after 60 payments: remaining balance $374,220 (rounded to the dollar). Option B at 6.25%, after 60 payments: remaining balance $372,199.

Option B’s balance is $2,021 lower. Good for Dana. Now total the cost:

• Option A total outlay + balance = $155,663 + $374,220 = $529,883
• Option B total outlay + balance = $8,000 + $147,772 + $372,199 = $527,971

Option B is ahead by $1,912 at month 60. So on this accounting Dana has already broken even before month 60, earlier than the lender’s 61 months, not later.

Here’s the twist that flips it back. That comparison quietly assumes the $8,000 was free money sitting in a drawer with no alternative use. It wasn’t.

What does the $8,000 cost her if it stays in her pocket?

It costs whatever it would have earned. This is the piece almost every points calculator drops, and it’s the piece that moves the answer most.

Dana’s $8,000 doesn’t vanish into thin air in Option A. It goes into her savings, or her emergency fund, or a brokerage account, or it just reduces how much she borrows from her parents. Suppose it earns 4% a year, compounded monthly, which is roughly what a plain deposit account paid through 2025 and early 2026. The SEC’s compound interest calculator on Investor.gov will run this for you, but the arithmetic is short enough to show.

$8,000 × (1 + 0.04/12)^60 = $8,000 × 1.22100 = $9,768 after five years. Forgone gain: $1,768.

Add that to Option B’s cost at month 60: $527,971 + $1,768 = $529,739, against Option A’s $529,883. Option B is ahead by $144. Almost dead level.

Push the same calculation to different months and you can find where it crosses zero properly. Doing that month by month, the advantage of Option B (balance-adjusted, with the 4% opportunity cost applied) turns positive somewhere in the high 50s and stays positive, but the margin is so thin through the first six years that any of the wrinkles in the next section can move it. Under a 6% assumed alternative return rather than 4%, the $8,000 grows to $10,791 by month 60, a $2,791 forgone gain, and Option B is behind by $879 at that point. Breakeven then lands around month 76.

That range, roughly 60 to 90 months depending on what the cash would otherwise earn, is the honest answer. Anyone giving you a single number to the decimal place has picked an opportunity cost for you without saying so.

How do the two loans compare across the years?

Below is Dana’s total cost under each option at four checkpoints. Total cost means cash paid out to date plus the remaining loan balance, and for Option B it includes the $8,000 at closing plus the forgone 4% growth on that $8,000 to that date. All figures in dollars, rounded.

Read the third column against the first. At two years, buying points has cost Dana $675 more than not buying them. By five years they are level. By eight years she is $886 ahead, and by ten years $1,248 ahead. The gain keeps widening after that, but slowly, and it only ever materialises if she keeps the loan.

Note how flat this is. Five years of commitment for a four-figure gain on a $400,000 loan. Points are not a lever that transforms the economics of a house purchase. They are a modest bet on how long you’ll keep a specific loan.

What makes this bet go wrong?

Two things, and both are about the loan ending early.

Refinancing. If rates drop to 5.25% in 2028 and Dana refinances, her 6.25% note dies with a little over two years of life. She paid $8,000 for a rate she used for 30 months. The $8,000 does not follow her to the new loan. It’s gone.

This is the asymmetry that makes points a harder call than the arithmetic alone suggests. If rates fall, you refinance and lose the points. If rates rise, you keep the loan and the points pay off, but you’d also have been fine with the higher no-points rate because you were never refinancing anyway. You’re buying protection in the scenario where you least need it.

Selling. Median tenure in a home in the United States runs under a decade, and for a first-time buyer it’s typically shorter still. If Dana is realistically a five-to-seven-year owner, she’s paying $8,000 to reach a breakeven that arrives around the same time she’s calling a realtor.

Ask yourself the honest version of the question. Not “do I intend to stay 30 years”, because everyone intends that at closing. Ask what happened the last two times you thought you’d stay put.

Does the tax deduction change the answer?

It can, and the direction is toward points looking better, but only for a minority of borrowers now.

Points paid on a loan to buy your main home are generally deductible in the year paid, provided several conditions are met, rather than spread over the life of the loan the way points on a refinance are. The rules live in IRS Publication 936, and the conditions are specific enough that you should read them or ask a preparer rather than assume.

The catch is that the deduction is only worth anything if you itemise. Since the standard deduction rose sharply in 2018, the large majority of filers take the standard deduction and get zero benefit from mortgage points, mortgage interest, or property taxes. Dana needs her total itemised deductions to exceed the standard deduction before the first dollar of point deduction does anything for her.

If she does itemise and she’s in the 24% bracket, the $8,000 in points reduces her tax by up to $1,920 in the year of purchase. That effectively drops the cost of the points to $6,080, which pulls the simple breakeven from 60.8 months down to $6,080 ÷ $131.52 = 46.2 months. That’s a real difference. It’s also entirely conditional on facts about her tax return that have nothing to do with the mortgage.

Do not assume the deduction. Check whether you itemise first, then redo the arithmetic.

Why is the APR lower on the loan with points?

Because APR folds the points into the cost of credit and spreads them across the full term, while the note rate doesn’t.

Dana’s Option B has a 6.25% note rate. Its APR is higher than 6.25%, because the $8,000 is an additional cost of borrowing. Roughly, spreading $8,000 across a 30-year $400,000 loan adds somewhere near 0.15 to 0.20 percentage points, so Option B’s APR lands near 6.42%. Option A’s APR sits just above 6.75% once its own smaller fees are counted.

So Option B still wins on APR, which is why the APR comparison nudges you toward points. That comparison assumes you hold the loan the entire 30 years. The CFPB’s explainer on rate versus APR makes this limitation explicit: APR is a full-term measure, and it stops being a fair comparison the moment you expect to sell or refinance early. Which, given the section above, is most people.

Use APR to compare two lenders quoting the same structure. Do not use it to decide whether to buy points.

Does inflation make prepaying interest smarter?

A fixed-rate mortgage is already an inflation hedge, and paying points intensifies that bet slightly rather than changing its nature.

Dana’s $2,462.87 payment is fixed in nominal dollars for 30 years. If prices rise 3% a year, that payment costs her less real income every year. Points make the fixed payment smaller, so they marginally increase the size of the hedge, but they cost her $8,000 in today’s dollars, which is the most valuable money in the whole sequence.

The direction of the effect depends on inflation over the next several years, which nobody knows. The BLS Consumer Price Index is the series to watch if you want to track how the real burden of the payment changes after the fact. It won’t tell you what to do in March 2026.

Do not let an inflation argument carry the decision. The breakeven arithmetic above is far more reliable than any forecast of the price level.

What this does not tell you

Several things, and they’re not footnotes.

Every number here is Dana’s loan. $400,000, 30-year fixed, 6.75% versus 6.25% at two points. Change any input and the arithmetic changes. A $250,000 loan with a quarter-point rate reduction for one point has a completely different breakeven, and it’s usually worse, because the fixed cost shrinks proportionally but so does the monthly saving.

Rate sheets are not linear. The first point often buys more rate reduction than the second, and the third often buys almost nothing. Ask your lender for the full grid, not just the option they lead with. If the second point only buys 0.125%, its breakeven is roughly four times as long as the first point’s.

I’ve ignored escrow, PMI, and insurance. Dana’s actual monthly payment includes taxes and insurance and possibly mortgage insurance. None of those change between Option A and Option B, so leaving them out doesn’t distort the comparison. It does mean the payment figures above are not what she’ll see on her statement.

The 4% and 6% alternative returns are assumptions I chose. They’re not forecasts and they’re not recommendations to put money anywhere. Substitute a rate that reflects where your money would genuinely sit.

Nothing here accounts for the risk of being cash-poor at closing. Handing over an extra $8,000 to save $131.52 a month is a bad trade if it leaves you without a repair fund three months after moving in. Liquidity has a value that doesn’t appear in a breakeven calculation.

I have not addressed lender credits, which are points in reverse: you take a higher rate and the lender pays some of your closing costs. The same arithmetic runs backward, and if your holding period is short, credits often beat points.

FAQ

How many months does it take for one mortgage point to pay off?

For Dana’s loan, one point ($4,000) buying the rate from 6.75% to 6.50% cuts the payment from $2,594.39 to $2,528.27, a saving of $66.12 a month. That’s $4,000 ÷ $66.12 = 60.5 months on the simple calculation, essentially the same as the two-point version because the rate sheet in this example is priced linearly. Real rate sheets rarely are, so run your own numbers rather than assuming the first point and the second point break even at the same time.

Should I buy points if I might refinance in two years?

The arithmetic says no. At month 24, Dana’s Option B costs $675 more than Option A once opportunity cost is counted, and refinancing at that point locks in the loss permanently because the points don’t transfer to the new loan. Points reward loan longevity and nothing else. If you can name a plausible reason you’d refinance inside four years, the money is better held in cash.

Are mortgage points tax deductible?

Points paid to buy a primary residence are generally deductible in the year paid if the loan meets the conditions in IRS Publication 936. Points on a refinance normally must be deducted across the life of the loan instead. Both are worthless unless you itemise, and since 2018 most filers don’t. Check that first, before you factor any tax benefit into a breakeven.

Does buying points lower my loan balance faster?

Yes, slightly. At month 60, Dana’s 6.25% loan has a balance of $372,199 against $374,220 on the 6.75% loan, a $2,021 difference. That happens because more of each fixed payment goes to principal when less of it goes to interest. It’s a genuine benefit that pure cash-flow breakeven calculations miss, worth roughly $34 a month in disguised equity over the first five years.

Is a lower APR always the better deal?

No. APR assumes you hold the loan for its full term, which spreads the up-front points across 360 months and makes them look cheap. If you sell in year five, you paid for 360 months of benefit and used 60. APR is the right tool for comparing two lenders quoting the same fee structure on the same loan; it’s the wrong tool for deciding whether to prepay interest.

What if I can only afford the points by borrowing them?

Then you’re not buying points, you’re refinancing the fee at another rate, and the comparison collapses. Rolling points into the loan amount raises the balance, which raises the payment, which eats the saving. If the $8,000 comes from a credit card or a family loan carrying interest, the breakeven extends by however long it takes to repay that debt, and the whole exercise usually stops making sense.

What to look at next

Ask your lender for the full rate-and-points grid rather than two options, and work out the breakeven for each rung separately. The marginal cost of the second and third point is where the deals get bad.

Pull your own numbers into the amortization formula rather than trusting a calculator that hides its assumptions. You need four inputs: loan amount, term, both rates, and the point cost in dollars.

Then answer the question the arithmetic can’t. How long will you really keep this loan? That single input moves the answer more than any of the others, and it’s the only one you control.

This article is general information, not financial advice. See our disclaimer.

Read next

• How One Extra Mortgage Payment Per Year Cuts Total Interest
• The Minimum Payment Trap: How Long It Actually Takes to Clear
• Car Loan vs Cash: The Total Interest You Pay to Drive
• What Inflation Does to Cash Savings Over a Decade

Also worth reading: Social Security at 62 vs 70: Where Breakeven Lands

Also worth reading: Series I Bonds: How the Fixed and Inflation Rate Combine

More in Money Tips · all topics · calculators · how this was checked