Mortgage Points and Buydowns: The Actual Break-Even Math on a $400,000 Loan

Discount points are the only closing cost that buys a permanent change to your interest rate, and they are also the mortgage line item buyers most often pay without running the math. On a $400,000 loan, one point costs $4,000 and typically lowers the rate by about 0.25%. Whether that is a good deal depends entirely on how long you keep the loan — and the break-even number is rarely the one people guess.

How Points Actually Price Out

Points Paid	Cost on $400k Loan	Typical Rate Reduction	New Rate (from 6.75%)
0	$0	—	6.75%
1	$4,000	~0.25%	6.50%
2	$8,000	~0.50%	6.25%
3	$12,000	~0.70%	6.05%

Notice the diminishing return: the first point buys 0.25%, but the third point adds only about 0.20% for the same $4,000. Lenders price points with declining efficiency, which is why paying three points is rarely better than paying one and investing the difference.

The Break-Even Calculation

One point on a $400,000 loan at 6.75%: the monthly principal-and-interest payment at 6.75% is $2,594. At 6.50% it is $2,529. That is $65 saved per month. To recover $4,000 at $65/month takes 61.5 months — just over five years.

Two points: payment falls to $2,463, saving $131/month. Recovering $8,000 takes 61 months — essentially the same break-even. This is the key insight: because of the declining rate reduction, stacking points does not shorten your break-even window the way most people assume.

You can model your own scenario with a mortgage calculator — plug in the base rate, the discounted rate, and compare the payment difference against the point cost.

When Points Make Sense — and When They Don’t

• Worth it: You are certain you will stay in the home past the break-even point (5+ years for one point at current spreads)
• Worth it: You are retired or on a fixed income and want the lowest possible fixed payment for cash-flow reasons
• Not worth it: You plan to refinance within 3-4 years — you lose the unamortized point value entirely
• Not worth it: You plan to sell within 5 years — the point cost is not recoverable in a sale
• Not worth it: Paying points drains your emergency fund below 3 months of expenses

Points Are Not Always Tax-Deductible in One Year

This is the detail that surprises most buyers. Points paid on a purchase mortgage are generally deductible in the year paid, but points paid on a refinance must be deducted ratably over the life of the loan. On a 30-year refinance, a $6,000 point payment is deducted at $200 per year — $200 in each of the next 30 years, not $6,000 up front.

Also note the cash-flow trap: the $4,000 you spend on a point cannot be borrowed from the lender as part of the point deduction. The IRS requires that points be paid from your own funds and not financed through the loan amount to qualify for the deduction.

Frequently Asked Questions

What is the difference between discount points and origination points? Discount points buy down your rate. Origination points are a lender fee for making the loan and do not lower your rate. Always confirm which one appears on your Loan Estimate.

Can I negotiate the point cost? Yes, but rarely the per-point price. You can negotiate the list of fees attached to the loan (application, processing, underwriting) which is often more effective than trying to halve a discount point.

What if rates fall after I pay points? You refinance and lose the remaining point value. This is the strongest argument against paying more than one point in a rate environment with any expectation of decline.

Do points affect the APR I am quoted? Yes, points are folded into the APR calculation, which is exactly why the loan with points shows a higher APR even though its interest rate is lower. Compare both numbers before committing.

The Bottom Line

One point breaks even at roughly five years and one month on a typical loan with current spreads. Because each additional point delivers a smaller rate reduction, stacking points does not shorten the break-even — it just ties up more cash for the same waiting period. If your time horizon is under five years or you expect to refinance, keep the cash and take the higher rate.

Points Are Not Always Tax-Deductible in One Year

This is the detail that surprises most buyers. Points paid on a purchase mortgage are generally deductible in the year paid, but points paid on a refinance must be deducted ratably over the life of the loan. On a 30-year refinance, a $6,000 point payment is deducted at $200 per year — $200 in each of the next 30 years, not $6,000 up front.

Also note the cash-flow trap: the $4,000 you spend on a point cannot be borrowed from the lender as part of the point deduction. The IRS requires that points be paid from your own funds and not financed through the loan amount to qualify for the deduction.

Frequently Asked Questions

What is the difference between discount points and origination points? Discount points buy down your rate. Origination points are a lender fee for making the loan and do not lower your rate. Always confirm which one appears on your Loan Estimate.

Can I negotiate the point cost? Yes, but rarely the per-point price. You can negotiate the list of fees attached to the loan (application, processing, underwriting) which is often more effective than trying to halve a discount point.

What if rates fall after I pay points? You refinance and lose the remaining point value. This is the strongest argument against paying more than one point in a rate environment with any expectation of decline.

Do points affect the APR I am quoted? Yes, points are folded into the APR calculation, which is exactly why the loan with points shows a higher APR even though its interest rate is lower. Compare both numbers before committing.

The Bottom Line

One point breaks even at roughly five years and one month on a typical loan with current spreads. Because each additional point delivers a smaller rate reduction, stacking points does not shorten the break-even — it just ties up more cash for the same waiting period. If your time horizon is under five years or you expect to refinance, keep the cash and take the higher rate.