When does it make sense to pay points?

Paying points only makes sense when:

  • You have the funds available to pay them
  • You plan to stay in the loan longer than the breakeven period

Here's how it works. Points are an upfront payment to the lender (one point equals one percent of the loan). In exchange, the lender lowers the rate and thus your monthly payment. At some point, your cumulative monthly savings exceed the points you paid upfront. At that point you have reached breakeven and begin coming out ahead.

As a general rule of thumb, you need to stay in a new loan for three or four years to breakeven-- after that, you're ahead.

See our "Should I pay points to reduce my rate?" calculator to analyze your loan options.