How discount points break-even works
Discount points are prepaid interest paid to the lender at closing in exchange for a lower note interest rate on your mortgage. Each point costs 1% of the loan amount ($1,000 for every $100,000 borrowed) and typically reduces the interest rate by 0.25% (25 basis points).
The Break-Even Rule: To find your break-even point, divide the upfront cost of the points by the monthly payment savings. If you keep the mortgage longer than the break-even timeline, you save money. If you sell, move, or refinance before reaching break-even, you forfeit the remaining upfront cash.
Tax Treatment: Discount points paid on a loan to purchase or build a primary residence may be deductible in the year paid if you itemize deductions on IRS Form 1040 (Schedule A) and meet IRS Publication 936 requirements. Points paid on a refinance must generally be amortized and deducted proportionally over the entire loan term. This is general educational information, not tax advice.
Opportunity Cost: Paying points consumes cash at closing that could otherwise remain in an emergency reserve or earn interest in high-yield savings or Treasury bills.
Disclaimer: A planning estimate based on your inputs and the assumptions shown. Actual costs and eligibility may differ. Not an offer of credit, pre-approval, or financial, tax, or legal advice.