Should You Buy Mortgage Points? The Director’s Cut of Your Mortgage

By Jonathan Washburn, The Solido Group · NMLS #1645952

@thedeanofmortgages

Everyone wants the lowest mortgage rate. But what if getting the lowest rate actually costs you more money? 👀 Before you pay points, there’s one simple calculation you need to understand. #MortgageTips #MortgageRates #HomeBuying #SolidoGroup #DeanOfMortgages

♬ nhạc nền – Plennus – Plennus

One question that we get a lot from borrowers is, “Should I spend more money upfront to lower my interest rate?”

Buying mortgage points is a little like paying extra for the Director’s Cut of a movie.

Buying Mortgage Points Is Like Buying a Director’s Cut

Sometimes you get Kingdom of Heaven.

The theatrical version of Ridley Scott’s film is perfectly cromulent, albeit a little confusing and underwhelming. Then you watch Ridley Scott’s much longer Director’s Cut and realize, “Oh. This is the movie they were supposed to release.”

You paid a little more, but what you got was substantially better. I would go so far as to say that the Director’s Cut of Kingdom of Heaven is so superior to the original, that it’s not even worth watching the theatrical version of the film.

But other times, you pay an extra $10 for the unrated version of Anchorman. And what do you get? Well, not much. A few extra curse words, a couple of scenes that probably belonged on the cutting-room floor, and essentially the same movie that made you laugh hysterically in theaters.

You paid for an upgrade. You just didn’t get much of one.

Mortgage points can work the same way.

First: What Are Mortgage Points?

One of the biggest misconceptions about mortgages is that you have a single interest rate available.

There isn’t. In fact, mortgage rates work a lot more like a menu.

Depending on the loan and the market that day, your lender might be able to offer you several different interest rates at several different prices. Generally, you can accept a higher interest rate with lower upfront costs, or you can pay additional money at closing to get a lower interest rate.

That additional cost will show up in Section A of your Loan Estimate as discount points.

One point equals 1% of your loan amount. So on a $400,000 mortgage, one point would equal $4,000.

How Much Do Mortgage Points Lower Your Rate?

But that doesn’t mean one point lowers your rate by a fixed amount. There is no universal conversion like “one point equals 0.25% off your rate.” The pricing difference between rates changes constantly based on the mortgage market, loan program, borrower profile, and other factors. Sometimes, it’s actually even cheaper to buy the rate down MORE than LESS. Why? Because lenders work just like any other retailer. And the rates that they are selling you are priced very specifically. I have seen a 5.75% rate cost LESS than a 5.875%. Probably because a lender thinks the borrower is a lot more likely to hold onto that 5.75% for a long time than he is to hold onto the 5.875%.

So the important question isn’t simply:

“How many points am I paying?”

It’s:

“How much am I paying, and what am I getting in return?”

Let’s Go Back to the Director’s Cut

Imagine you’re borrowing $400,000.

Your lender gives you two options:

Option A: 6.75% with no discount points.

Option B: 6.25% with $4,000 in discount points.

These numbers are a hypothetical example for illustration only. They are not a rate quote or an offer, and actual rates and costs vary by borrower and change daily.

Obviously, 6.25% looks better.

And it is a lower interest rate.

But that doesn’t automatically make it the better financial decision.

You’re paying an additional $4,000 today in exchange for a lower monthly payment for as long as you keep that mortgage.

That’s the Director’s Cut.

You paid extra for the upgraded version.

Now we have to figure out whether the upgrade was actually worth buying.

The Most Important Number: Your Break-Even Point

Let’s say paying that $4,000 saves you approximately $130 per month.

The math is extremely simple:

$4,000 ÷ $130 = about 31 months

That means your break-even point is roughly 31 months.

For those first 31 months, you haven’t really “saved” $130 per month. You’re recovering the $4,000 you paid upfront.

After approximately 31 months, you’ve made your money back.

From that point forward, the lower payment starts producing real savings compared with the no-point option.

That’s why the amount of time you keep the mortgage matters so much.

Sometimes You Bought Kingdom of Heaven

Suppose you buy the house, pay the $4,000 for the lower rate, and keep that mortgage for seven years.

You passed your break-even point years ago.

Every month after that break-even point, you continued benefiting from the lower payment.

You paid extra for the Director’s Cut—and the Director’s Cut was legitimately better.

That can be an excellent use of discount points.

And Sometimes You Bought Anchorman: Unrated

Now imagine exactly the same transaction.

You spend the $4,000.

You get your 6.25% rate.

And twelve months later, mortgage rates fall substantially and you refinance.

You only received twelve months of that $130 monthly savings.

That’s about $1,560.

But you paid $4,000 to get it.

You spent $4,000 to save $1,560.

You never got anywhere close to your break-even point.

Congratulations.

You bought Anchorman: Unrated Edition.

You paid extra for a couple of additional curse words and a scene that should have stayed on the cutting-room floor.

This Is Why “What’s Your Lowest Rate?” Is the Wrong Question

Borrowers understandably focus on interest rates.

Interest rates matter—a lot.

But a rate without a cost is almost meaningless.

If Lender A offers you 6.25% and Lender B offers you 6.50%, that does not necessarily mean Lender A has the better deal.

What if Lender A charges $8,000 for 6.25%, while Lender B offers 6.50% for essentially no additional cost?

Now we actually have something to analyze.

How much does the lower rate save each month?

What does it cost upfront?

How long will it take to recover that cost?

And how likely are you to keep this particular mortgage beyond that point?

Those questions tell us far more than a simple comparison of two interest rates.

When Does Buying Mortgage Points Make Sense?

There is no universal answer.

General mortgage knowledge gives a simple rule. If you break even in less than 5 years, you should consider the buydown. If you break even in less than 3 years, you should almost CERTAINLY make that upfront investment if you are able. But this simple rule doesn’t apply to every borrower.

Points tend to become more attractive when the cost to lower the rate is relatively inexpensive, the monthly savings are substantial, and you expect to keep the mortgage well beyond the break-even point.

They tend to become less attractive when the cost of the rate reduction is high, you expect to sell relatively soon, or you reasonably expect to refinance before reaching your break-even point.

There are other considerations too. Cash is valuable. Spending another $5,000 at closing means having $5,000 less in your bank account after closing.

So even when the break-even calculation looks good, we still have to ask whether buying points is the best use of that money.

Don’t Automatically Buy the Lowest Rate

When we help someone compare mortgage options, we don’t want to simply show them the lowest interest rate that we can put on paper.

We want to know whether paying for that rate actually makes sense.

Sometimes paying points is an outstanding financial decision.

Sometimes taking a slightly higher rate and keeping thousands of dollars in your pocket is the smarter move.

And sometimes the answer falls somewhere in between.

So the next time you’re looking at mortgage rates, don’t just ask:

“What’s the lowest rate I can get?”

Ask:

“How much does that rate cost me, how much does it save me each month, and what’s my break-even point?”

Because when you’re paying extra for the Director’s Cut of your mortgage, you should probably make sure you’re getting Kingdom of Heaven.

Not just a few extra curse words from Ron Burgundy.

This article is for general educational purposes only. It is not an offer or solicitation, a commitment to lend, a rate quote, or financial, legal, or tax advice. Loan program guidelines, rates, and requirements change and vary by borrower, lender, and state; confirm current details with a licensed loan officer. All loans are subject to credit approval. The Solido Group is a branch of Barrett Financial Group, L.L.C., NMLS #181106. Not all products are available in all states; see our licensing page. Equal Housing Opportunity.