What Are Mortgage Discount Points?
When you get a mortgage quote, you'll see an interest rate and a section for closing costs. Within those costs, you may see an option for 'discount points'. Mortgage discount points are essentially a form of prepaid interest. You pay an upfront fee to the lender in exchange for a lower interest rate on your loan.
One point costs 1% of the total loan amount.
- Example: On a $400,000 mortgage for a home in Las Vegas, one discount point would cost you $4,000 at closing. In return, the lender might reduce your interest rate by a specific amount, though the exact reduction for one point varies by lender and market conditions.(The data, information, or policy mentioned here may vary over time.)
The choice is simple: pay more now to pay less each month. The difficult part is figuring out if this trade-off is actually a smart financial move for your specific situation. It all comes down to a simple calculation.
Calculating Your Break-Even Point: The Simple Formula
The 'break-even point' is the moment in time when your accumulated monthly savings from the lower interest rate equal the upfront cost of the points you paid. If you sell the home or refinance before you reach this point, you've lost money on the deal. If you stay in the home beyond this point, you start realizing real savings every month.
Here’s how to calculate it in three easy steps.
Step 1: Determine the Cost of the Points
First, calculate the dollar cost of the points. This is simply the loan amount multiplied by the percentage of the points.
- Formula: Loan Amount x Points (%) = Cost of Points
- Example: You're buying a home in Henderson with a $450,000 loan. The lender offers to lower your rate if you pay 1.5 points.
- Calculation: $450,000 x 0.015 = $6,750
This is the upfront cost you need to pay at closing.
Step 2: Calculate Your Monthly Savings
Next, determine how much the lower interest rate will save you each month. You’ll need to compare the principal and interest (P&I) payment for both the loan with points and the loan without points.
- Example Scenario:
- Loan without points: $450,000 at 7.0% interest = $2,994 monthly P&I payment.
- Loan with 1.5 points: $450,000 at 6.625% interest = $2,887 monthly P&I payment.
- Calculation: $2,994 - $2,887 = $107 in monthly savings.
Step 3: Find the Break-Even Point
Finally, divide the total cost of the points by your monthly savings to find out how many months it will take to recoup your initial investment.
- Formula: Cost of Points / Monthly Savings = Months to Break Even
- Calculation: $6,750 / $107 = 63 months (or 5 years and 3 months).
In this Las Vegas-area example, you would need to keep your mortgage for more than five years and three months to make paying points worthwhile.
When Paying Points Makes Financial Sense in Nevada
Paying points isn't for everyone, but it can be a powerful strategy in the right circumstances. The decision hinges almost entirely on your long-term plans and current financial situation.
You Plan to Stay Long-Term
If the home you're buying is your 'forever home' or you're confident you'll be there for at least 7-10 years, paying points becomes much more attractive. Once you pass the break-even point, every single mortgage payment puts extra money back in your pocket. The longer you stay, the more you save. For buyers settling down permanently in communities like Reno or Las Vegas, this can lead to thousands of dollars in interest savings over the life of the loan.
You Have Excess Cash and Prioritize Lower Monthly Payments
Some homebuyers, particularly those who are financially conservative or on a fixed income, prioritize having the lowest possible monthly payment. If you have ample cash reserves for your down payment, closing costs, and a healthy emergency fund, using some of that extra cash to buy down your rate can provide peace of mind and improve your monthly cash flow for decades to come.
When to Avoid Paying Points and Keep Your Cash
In many scenarios, paying points is not the wisest use of your funds. Keeping cash on hand provides flexibility and security that can be more valuable than a slightly lower monthly payment.
You Expect to Move or Refinance Soon
This is the most common reason to avoid points. If there's a strong possibility you'll be relocating for a job, upgrading to a larger home, or refinancing to a lower rate within a few years, you almost certainly won't hit your break-even point. In this case, paying points is like giving the lender an interest-free loan that you never get back. If you think you might sell that Reno home in three years, you would lose money on the transaction.
You Need Funds for Other Expenses
Buying a home comes with many expenses beyond the down payment, closing costs. You'll need money for:
- Closing costs (which can be 2-5% of the purchase price)
- Moving expenses
- Furniture and appliances
- Immediate repairs or renovations
- Building a robust emergency fund (3-6 months of living expenses)
For most buyers, cash is tight. It's often more prudent to keep thousands of dollars liquid to cover these essentials rather than tying it up in prepaid interest.
Advanced Considerations for Your Mortgage Point Strategy
Beyond the basic break-even calculation, several other factors can influence your decision. Here are a few more things to consider for your Nevada home loan.
Can I use seller credits to pay for mortgage points?
Yes. This is a fantastic strategy. In a buyer's market, you can often negotiate for the seller to provide a credit towards your closing costs. This credit can then be used to pay for discount points. This allows you to secure a lower interest rate without spending your own cash, giving you the best of both worlds: a lower monthly payment and preserved savings.(The data, information, or policy mentioned here may vary over time.)
Is the calculation different for a primary home versus a Reno investment property?
The math for the break-even point is exactly the same. However, the strategy behind the decision changes. For an investment property in Reno, your primary goal is positive cash flow. A lower monthly mortgage payment, achieved by paying points, directly increases your monthly profit. You must weigh the upfront cost against the improved long-term return on investment. The key consideration is whether that upfront cash could be better used for a down payment on another property or for a renovation to increase rental income.
Are mortgage points tax deductible?
Generally, yes. The IRS allows you to deduct points in the year you pay them if you meet certain criteria. The loan must be for your main home, paying points must be an established practice in your area, and the points paid must not be excessive. This tax deduction can effectively lower the cost of the points, shortening your break-even period. However, tax laws are complex. You should always consult with a qualified tax professional to understand how this applies to your specific financial situation.(The data, information, or policy mentioned here may vary over time.)
Does a higher loan amount make paying points more or less attractive?
A higher loan amount magnifies everything. For a luxury home in Las Vegas with a $1 million loan, one point costs a significant $10,000. While this is a large upfront sum, the corresponding monthly savings from the rate reduction will also be much larger than on a smaller loan. The break-even timeline in months may end up being similar, but the decision becomes a higher-stakes game. The key question is whether you are comfortable parting with that much cash at closing.
Deciding on mortgage points involves personal financial goals. To see if paying points aligns with your homeownership strategy in Nevada, a conversation with a mortgage expert can provide the clarity you need. Apply now to receive a detailed analysis and find the right path for your situation.
Author Bio
David Ghazaryan is the expert mortgage strategist and founder behind iQRATE Mortgages. With a mission to fund home loans that traditional banks won't touch, David specializes in helping clients with unique financial situations, including those recovering from foreclosure or bankruptcy. He expertly crafts smart, strategic, and stress-free mortgages by leveraging a vast network of over 100 lenders to secure competitive rates for investors and homebuyers alike. Praised for exceptional customer service, David has helped hundreds of families with a 97% satisfaction rate, guiding them to the mortgage they deserve.
References
CFPB - What are discount points and lender credits and how do they work?
