Mortgage Points: Buy Down the Rate or Invest the Cash?

At closing, your lender will almost certainly offer you the option to buy discount points — a one-time upfront payment that reduces your mortgage rate for the life of the loan. It's framed as "saving money over the long term" and "locking in a lower payment."

For most borrowers, it's the wrong move.

Not because points are inherently bad. But because the typical borrower doesn't stay in their home or their mortgage long enough for the math to work, and the opportunity cost of the upfront cash is almost never accounted for. Here's how to run the numbers for yourself.

What Mortgage Points Actually Are

A discount point costs 1% of the loan amount upfront and typically reduces the interest rate by 0.25%. One point on a $400,000 loan is $4,000 paid at closing. In exchange, your rate drops from, say, 6.5% to 6.25%.

On its face, it's simple: you're prepaying interest to get a lower rate. The question is whether the prepaid interest saves more than it costs.

The Break-Even Calculation

Let's work through a realistic 2026 scenario.

Loan: $400,000, 30-year fixed Rate without points: 6.50% Monthly principal and interest: $2,528 Rate with 1 point ($4,000): 6.25% Monthly principal and interest: $2,463 Monthly savings: $65

Break-even: $4,000 / $65 = 61.5 months, or about 5.1 years.

If you keep the mortgage — without refinancing — for more than 5.1 years, buying the point saves you money. After 10 years, you're ahead by about $3,800. After 30 years, you save about $19,400 total.

But "keeping the mortgage" means staying in the home and not refinancing. Both assumptions are shaky.

The Refinancing Risk

Most mortgages don't last 30 years. They don't even last 10. Homeowners refinance when rates drop, they sell when they move, and the average mortgage life is closer to 7 years.

If rates fall to 5.5% in year three and you refinance, you've paid $4,000 for three years of savings — about $2,340. You're $1,660 in the hole. The point was a losing bet.

In 2026, with mortgage rates elevated relative to the post-2008 era, the probability of a refinancing opportunity within 5 to 7 years is not trivial. If you think there's a decent chance rates drop meaningfully, points are a bet against that outcome.

The Opportunity Cost

Here's the dimension your lender will never mention: the $4,000 you spend on points could be invested instead. What's that worth?

• Invested in a total stock market index fund earning 7% annually: after 5 years, roughly $5,600. The points don't beat that until about year 8.
• Invested conservatively at 4.5% (current high-yield savings or money market rates): after 5 years, roughly $4,990. The points don't beat that until about year 7.
• Used to make a larger down payment: every extra dollar of down payment is a dollar you're not borrowing at 6.5%. That's a guaranteed 6.5% return — better than the points' implicit return of about 5.8% over 10 years.

The point is: the opportunity cost of the $4,000 is not zero. Comparing points to doing nothing misses the alternative uses of the cash. And for most alternative uses — especially a larger down payment — the math favors skipping the points.

When Points Actually Make Sense

There are scenarios where buying points pencils out:

You're highly confident you'll stay in the home long-term. Not "we might stay a while" — you bought your forever home, your kids are in school, your jobs are stable, and you'd need a life-altering event to move. In that case, the 10-to-30-year savings are real.

Rates are unlikely to drop significantly from current levels. If you're buying at 6.5% and the Fed's long-term neutral rate projections suggest rates will stay elevated, the refinancing risk is lower.

You have excess cash and no better use for it. If you've already maxed out tax-advantaged accounts, have a fully funded emergency fund, and the $4,000 is genuinely idle, points offer a modest but reliable return.

The lender offers a credit or the seller is paying. Some lenders offer lender credits that offset points. Some sellers in slow markets agree to pay points as a concession. If someone else is funding the points, the math changes entirely.

When Points Are the Wrong Move

You might move within 7 years. The data says most people do. The average homeowner stays in their home for about 8 to 10 years, but that average is skewed by long-tenured empty nesters. First-time and move-up buyers move more frequently.

You think rates might fall. If you'd refinance at 5.5%, you're betting against your own points purchase.

The cash is better used as a larger down payment. Reducing the loan amount is almost always better than buying down the rate on a larger loan. A $400,000 loan at 6.25% costs more per month than a $394,000 loan at 6.50%. If you have $4,000, put it toward the down payment — you save on both interest and principal.

You're stretching to afford the home. If $4,000 in points means a thinner emergency fund, skip the points. The emergency fund for a new homeowner is more important than 0.25% on the mortgage rate. A $12,000 roof repair at 6.25% doesn't care that you saved 25 basis points.

The Decision Framework

Before closing, run three numbers:

1. Break-even in months: Points cost / monthly savings = months until you're ahead. Under 48 months? Points are aggressive but reasonable. Over 72 months? Probably pass.

2. Opportunity cost at 7%: Points cost compounded at 7% annually vs. cumulative savings from the lower rate. When does the lower rate win? If the answer is "after year 10," you're betting on a mortgage you likely won't still have.

3. Down payment alternative: Apply the points cost to the down payment instead. What's the new monthly payment on the reduced loan at the higher rate? Often, the larger down payment produces a similar or better monthly payment — without the break-even risk.

The Bottom Line

Mortgage points are a bet that you'll hold this specific mortgage for longer than the break-even period — typically 5 to 7 years. Most people don't. They sell, they refinance, or life happens.

For buyers in forever homes at elevated rates who are confident they won't refinance, points can make sense. For everyone else, the cash is almost certainly better deployed as a larger down payment, invested in a diversified portfolio, or held as an emergency buffer for the first-year surprises every homeowner faces.

Your lender will pitch points as a way to save money. Your spreadsheets should treat them as a bet you're making against yourself.