You're sitting with your Loan Estimate and your lender gives you two options:
- Option A: 7.0% with no points
- Option B: 6.625% for 1 point ($4,000 upfront on a $400,000 loan)
Which one is the better deal?
The answer isn't "the lower rate." The answer is: it depends on how long you keep the loan. And I'm going to show you exactly how to figure it out.
What points actually are
One mortgage point = 1% of your loan amount, paid upfront at closing to permanently lower your interest rate.
On a $400,000 loan:
- 1 point = $4,000
- 0.5 points = $2,000
- 2 points = $8,000
In exchange for that upfront payment, your lender reduces your rate, typically by 0.125%–0.375% per point, depending on market conditions and your loan type. The exact reduction varies. Always ask for the specific tradeoff before making any decision.
Points are not the same as origination fees. An origination fee is what the lender charges to process your loan. Points are what you pay specifically to reduce your rate. Both show up on your Loan Estimate. Read them carefully.
The breakeven calculation
The only question that matters: How many months will it take for your monthly savings to recover the upfront cost?
Formula: Breakeven (months) = Upfront cost of points ÷ Monthly payment savings
Here's how that plays out on a $400,000 loan:
Scenario 1: 1 Point ($4,000 upfront)
| No Points | 1 Point | |
|---|---|---|
| Rate | 7.0% | 6.625% |
| Monthly P&I | $2,661 | $2,565 |
| Monthly savings | — | $96 |
| Upfront cost | $0 | $4,000 |
| Breakeven | — | ~42 months |
If you keep this loan longer than 42 months (~3.5 years), you come out ahead by paying the point. If you sell, refinance, or pay off the loan before that, you lose money.
Scenario 2: 0.5 Points ($2,000 upfront)
| No Points | 0.5 Points | |
|---|---|---|
| Rate | 7.0% | 6.75% |
| Monthly P&I | $2,661 | $2,594 |
| Monthly savings | — | $67 |
| Upfront cost | $0 | $2,000 |
| Breakeven | — | ~30 months |
A smaller buydown with a faster breakeven. Still requires staying in the loan for 2.5 years to break even.
Scenario 3: 2 Points ($8,000 upfront)
| No Points | 2 Points | |
|---|---|---|
| Rate | 7.0% | 6.375% |
| Monthly P&I | $2,661 | $2,495 |
| Monthly savings | — | $166 |
| Upfront cost | $0 | $8,000 |
| Breakeven | — | ~48 months |
More savings per month, but it takes 4 years to recover the cost. A bigger bet on staying put.
The variable nobody accounts for: where does the money come from?
Most buyers think of this as a simple choice: pay more upfront or pay more monthly. But there's a third factor: opportunity cost.
If you spend $4,000 on points instead of putting it toward your down payment, you might be paying PMI. Or you might have fewer liquid reserves after closing, which carries its own risk.
The real question isn't "should I buy points?" It's "what's the best use of this $4,000?"
Run three scenarios:
- Use the money for points
- Use it toward a larger down payment (reduces loan size, eliminates or reduces PMI)
- Keep it as cash reserves
In many situations, the down payment or reserves option beats points, especially for buyers who are already tight on cash after closing.
Holding period: the honest truth about how long people keep mortgages
The average homeowner in the US sells or refinances within 5–7 years of purchase.
In the DMV market specifically, with job mobility, growing families, and a dynamic housing market, 5 years is a realistic planning horizon for many buyers.
That changes the math significantly. If your breakeven is 42 months and you expect to be in the home for 5+ years, buying a point makes sense. If you're a 28-year-old buying a starter condo and expect to move up in 3 years, it probably doesn't.
And here's the part most loan officers skip: refinancing resets the clock. If rates drop 1.5% in two years and you refinance, you never recover the points you paid on the original loan. The breakeven calculation becomes irrelevant.
When buying points makes sense, and when it doesn't
It makes sense when:
- You're confident you'll keep this loan for at least the breakeven period (be honest with yourself)
- You're buying in a high-rate environment and the buydown gets you to a more comfortable payment
- You have extra cash at closing that isn't needed for reserves or a stronger down payment
- You're purchasing a forever home or have a very stable housing timeline
It probably doesn't when:
- You're planning to refinance if rates drop (common assumption right now)
- You'll likely sell within 5 years
- Your cash would be better used toward down payment, closing costs, or emergency reserves
- Your breakeven period is longer than your expected holding period
Lender credits: the opposite trade
If buying points means paying more now for a lower rate, a lender credit is the reverse: accept a higher rate in exchange for the lender covering some of your closing costs.
Example on a $400,000 loan:
| Option | Rate | Credit |
|---|---|---|
| Standard rate | 7.0% | $0 credit |
| +0.375% rate | 7.375% | $3,000 credit toward closing costs |
This can work if you're short on cash at closing and need help covering fees. The tradeoff: you pay a higher rate every month you keep that loan. On a $400,000 loan, the rate increase from 7.0% to 7.375% costs about $100/month. If you keep the loan 5 years, that $3,000 credit will cost you ~$6,000 in extra interest.
Not necessarily a bad deal, but understand what you're trading.
How to use this information
Before you agree to any rate and points combination, ask your lender for:
- The par rate: the rate with zero points and zero credits (the baseline)
- The cost for each 0.25% rate reduction: so you can compare options fairly
- The breakeven calculation in writing
If your lender won't run these numbers clearly, that's a signal. A good loan officer should be able to give you a clear picture of every tradeoff, not just tell you "the lower rate is better."
The bottom line
Buying down your rate isn't a mistake. Neither is skipping points. The answer depends entirely on your timeline, your cash position, and your honest assessment of how long you're staying in this loan.
Run the math. Know your breakeven. Then decide.
Want to run the numbers for your situation?
If you want to run the specific scenarios for your situation (exact rate, loan size, projected timeline) that's exactly what a Mortgage Clarity Call is for.