Should You Buy Points? The Break-Even on a Rate Buydown: the facts

1. A discount point is cash paid at closing to lower the rate on a mortgage. The convention is that one point costs 1% of the loan, and the rate cut it buys is the lender's to quote: about 0.25% a point is common, and the cut often shrinks after the first point.
2. The rule of thumb divides what the points cost by the drop in the monthly payment. The truer count follows the interest each loan charges month by month, and it is a little shorter, because the lower rate also pays the balance down faster, so the bought-down loan is ahead by more than the payment saving alone.
3. Example: $400,000 for 30 years at 6.75%, one point for a 0.25% cut. The point costs $4,000 and the payment falls from $2,594.39 to $2,528.27. The rule of thumb says 61 months and the interest count says 48 months. Kept 7 years, the point leaves you ahead by about $3,039.
4. When every point buys the same cut, every count pays for itself in the same month, so more points buy a larger saving, not a sooner one. When the cut shrinks, the break-even stretches: at 0.125% a point instead of 0.25%, the same point takes 96 months to pay for itself and leaves you behind at 7 years.
5. Points are an investment, and the return is the payment saving plus the lower balance owed when you leave. Kept 7 years, the example point earns about 14.6% a year, well above the 6.75% the same cash would have earned paying down the loan. Kept 3 years it earns a loss of about 14.7% a year, because the points were paid and most of the saving never arrived.
6. A seller credit toward points costs you nothing, so it has paid for itself on day one. The fair question is whether the same dollars would do more as a price cut. In the example the credit lowers the payment by $40.18 a month more than the price cut does, the price cut leaves $2,147 more equity at 7 years, and the credit is ahead overall from month 65.

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