What Discount Points Buy, and How to Think About Them

A discount point is prepaid interest. You pay a percentage of the loan amount in cash at closing, and in return the lender lowers the interest rate on the note. One point equals one percent of the loan amount. The rate reduction it buys is not fixed by law or convention, it is set by what the secondary market will pay for that loan at that moment.

That last part matters more than people expect. How much rate a point buys moves with market pricing, credit profile, property type, occupancy, and loan size. The same point can buy a meaningfully different rate reduction on two loans closing the same week.

Points are also distinct from origination charges and from lender credits. Origination is what you pay to have the loan made. A lender credit is the reverse of a point: you accept a higher rate and the lender covers some of your closing costs. Reading a loan estimate well means knowing which of those three you are looking at.

The break-even is the point where the accumulated savings from the lower rate finally equal the cash you handed over at closing. Before that date, you are behind. After it, you are ahead. Everything else about points is commentary on that one date.

The calculation itself is simple: divide the cost of the points by the monthly savings the lower rate produces, and you get the number of months to break even. The hard part is not the arithmetic. It is being honest about whether you will still hold this exact loan on that date.

That is the question most people skip. A break-even in the low thirties of months is a different decision than one out past six or seven years, and the difference is not about the math being right, it is about how much of your future you are willing to commit to a single financing structure.

Three things end a break-even early, and all of them are common. You sell the property. You refinance again because rates moved. Or you pay the balance down aggressively enough that the interest savings shrink faster than you planned. In each case, the cash you spent on points does not come back.

Rate volatility deserves particular attention. If rates are elevated relative to recent history and there is a reasonable chance of refinancing within a few years, buying points is essentially betting that you will not take that opportunity. Paying to lock in an above-market rate more cheaply is a strange trade.

There is also an opportunity cost that rarely shows up on any worksheet. Cash spent on points is cash not sitting in reserves, not deployed into another asset, and not available for the property itself. For a borrower with equity and margin, that alternative use is often the real competing option, not a different rate.

Points are usually the wrong purchase when the holding period is short, uncertain, or dependent on something outside your control. If you cannot say with reasonable confidence that this loan will still be in place well past the break-even date, the cash is better kept liquid.

They are also questionable when the money would otherwise be reserves. Buying down a rate by draining the cushion that makes you a comfortable borrower trades a durable strength for a marginal monthly improvement. Lenders care about reserves. So should you.

On a cash-out refinance, there is an additional wrinkle. You are often paying points out of the very proceeds you took the loan to access, which means borrowing money in order to prepay interest on it. Sometimes that still pencils out. It deserves a deliberate look rather than a default yes.

Start by asking for the same loan priced two or three ways: with no points, with a modest buy-down, and with a lender credit. Seeing the options side by side turns an abstract question into a comparison you can actually judge.

Then set your own holding assumption before you look at the break-even numbers, not after. Deciding how long you expect to keep the loan while staring at a worksheet designed to make points look good is how people talk themselves into a longer horizon than they believe in.

Finally, compare the total cost over your stated horizon, not the rate alone. A lower rate figure is satisfying to say out loud. The number that matters is what the whole arrangement costs you across the years you actually own it. You can see how these pieces fit into a broader refinance decision on our loan options page.