Paying points buys a lower rate with cash today. Whether that trade pays off is a division problem with one honest input: how long you keep the loan.
One discount point costs one percent of the loan amount and buys a permanent rate reduction on that loan. How much reduction depends on the day and the program, so the only reliable way to evaluate points is to price the same loan with and without them and compare the two Loan Estimates.
The arithmetic is a division. Take the cost of the points, divide by the monthly payment saving, and you have the number of months before the trade breaks even. On an illustrative $400,000 loan, one point costs $4,000. If that point takes the rate from 6.500% to 6.250%, the payment falls by about $65 a month and the break even lands just past month 61, a little over five years.
That single number reframes the decision. Points are worth considering when you are confident you will hold the loan well past the break even month. They are usually a poor trade when you expect to sell, refinance or pay the loan off before it, because the cash was spent up front and the saving stops the day the loan does.
Two refinements make the estimate more honest. The saving is not free money if the cash could have gone to a larger down payment or to reserves, so compare against that use too. And the break even lengthens slightly once you account for the fact that the payment saving is spread over time rather than received today.
The mirror image is a lender credit: you accept a slightly higher rate and the lender pays part of your closing costs. That is the same trade run backwards, and it is often the better one for a borrower who is short on cash to close or who expects to move within a few years.
Illustrative sample figures for a template demonstration. Not a rate quote, not an offer to lend, and not live market data.
