Mortgage points are worth it if you plan to keep the loan long enough to pass your break-even point — the month where your monthly savings from the lower rate finally exceed what you paid upfront. If you expect to sell or refinance before that point, points usually aren't worth it. Discount points may also be tax-deductible, which changes the math slightly in your favor.
A mortgage point (or "discount point") is an upfront fee — typically 1% of your loan amount — paid at closing in exchange for a lower interest rate on the loan. The exact rate reduction per point varies by lender and market conditions, but it's usually somewhere around 0.125%–0.25% off your rate per point purchased.
The decision comes down to one calculation: your break-even point. Divide the upfront cost of the points by your monthly payment savings, and that tells you how many months it takes before the lower rate has paid for itself. After that point, you're pocketing the savings for as long as you keep the loan.
A real example: say you're financing a $350,000 home in Franklin with a 30-year fixed loan. Buying one point costs $3,500 upfront and might drop your rate from 7.00% to 6.75%, saving roughly $58 a month on principal and interest. Divide $3,500 by $58, and your break-even point is about 60 months — five years. If you're confident you'll be in that home past five years, the point pays for itself and then keeps saving you money every month after. If you think you might sell or refinance within three years, it likely isn't worth it.
The tax angle: discount points paid on a mortgage to buy or improve your primary residence are often deductible in the year paid, subject to IRS rules and limits. The IRS's Topic 504, Home Mortgage Points covers the specific requirements — including that the loan generally has to be secured by your main home and the points have to be a standard business practice in your area — so it's worth reviewing with your tax preparer, since your specific situation determines whether you can deduct the full amount in one year or have to spread it over the life of the loan.
I walk every buyer and refinance client through the actual break-even math with their real numbers before they decide whether to buy points — it's a straightforward calculation, but it only means something when it's run against your specific rate, loan amount, and how long you realistically expect to keep the loan.
