Rates, points and costs
Should I pay points on my mortgage?
Based on Shawn Way’s own teaching videosUpdated Sources checked
The short answer
Pay discount points only if you expect to keep the loan longer than the break-even point: the upfront cost divided by the monthly savings. In Shawn Way's example, one point on a $760,000 loan costs $7,600 and saves about $185 a month, so it takes about 41 months to recover. Selling or refinancing before the simple cash-flow break-even means the lower payments have not yet recovered the upfront point. A full cost comparison also considers the payoff balance, taxes and the value of your cash.
At a glance
| Choice | Rate | Monthly principal and interest | Upfront cost |
|---|---|---|---|
| No discount point | 6.99% | $5,051 | $0 |
| Pay one point | 6.625% | $4,866 | $7,600 (1% of the loan) |
Historical teaching example. Rates, payments and costs are not current pricing or an offer. Principal and interest only; taxes, insurance and any mortgage insurance are extra. One point doesn't buy the same reduction on every loan.
What is a discount point?
A discount point is prepaid interest: you pay the lender 1% of the loan amount at closing in exchange for a lower interest rate. On a $760,000 loan, one point costs $7,600. How much the rate drops for each point varies by lender, loan and day; there is no fixed conversion.
The opposite trade also exists. A lender credit gives you money toward closing costs in exchange for a higher rate. The CFPB describes both as ways to trade upfront cost against the monthly payment.
How do you calculate the break-even point?
Divide what the points cost by what they save each month.
$7,600 ÷ $185 ≈ 41.1 months
Using Shawn's rounded payments, the point pays for itself during the 42nd payment, about three and a half years in. That is a simple cash-flow break-even. It ignores what the $7,600 could have earned elsewhere, tax effects and the slightly different loan balances, so treat it as a starting comparison, not the whole decision.
What two questions decide it?
In his videos Shawn asks every borrower two things before recommending points:
- How long do you plan to own this home? If you might sell before the break-even month, the points don't pay off.
- What do you think happens to rates? A refinance ends the old loan early. If rates fall and you refinance in two years, a point that needed 41 months to recover is lost money. Nobody knows future rates, so compare the outcome both ways: if rates fall, and if they don't.
What about the "$66,000" in the video?
The first clip rounds the full-term savings to $66,000. Using the displayed $185 monthly difference gives $66,600 over 360 payments, before subtracting the $7,600 point. That leaves about $59,000 in simple net savings, but only if you keep the same loan for all 30 years. The video's "nine times return" is not an annual investment return; selling or refinancing early changes the result.
When can a lender credit make more sense?
If you expect to move or refinance within a few years, the reverse trade can fit: accept a higher rate and use a lender credit to reduce cash at closing. You pay more each month, so compare the credit with the extra interest over the time you expect to keep the loan. Ask for points, no points and a lender credit on the same loan, side by side.
Worked example: when the point pays off
| You keep the loan for | Payment savings | Minus the $7,600 point |
|---|---|---|
| 2 years (24 payments) | $4,440 | −$3,160 |
| 3.5 years (42 payments) | $7,770 | +$170 |
| 7 years (84 payments) | $15,540 | +$7,940 |
| 30 years (360 payments) | $66,600 | +$59,000 |
Savings are $185 a month times the number of payments, before taxes and investment returns.
Built from Shawn's historical example. Not current pricing or an offer.
Watch Shawn explain it
Part one works through the numbers on a legal pad. Part two explains why the numbers alone don't settle it.
Read the transcript
Let's say you're going to buy a house for $950,000 and you're going to put 20% down. So that'd be $190,000 down payment with a loan amount of $760,000. Now in that scenario, let's just say your par rate is 6.99%. par rate meaning you're not paying any extra interest upfront. Your payment would be $5,051 in that scenario. Now what some people don't realize is just because the par rate is 6.99% doesn't mean you can't actually get a lower interest rate. You can actually buy the rate down and you could pay points. A point is a percent of the loan amount. So in this scenario, one point would be $7,600 and if you paid that prepaid interest upfront, you would actually get a rate of 6.625 instead of 6.99, which would give you a monthly payment of $4,866. So that's going to save you $185 a month. Now with that $185 a month savings, this is a 30-year loan keep in mind, so that actually saves you $66,000 in interest over the life of the loan. So essentially you're paying $7,600 one time upfront to save yourself $66,000 in interest. That's a nine times return on investment. Now that might sound like a really good idea. Stay tuned for the next video where I explain why I personally wouldn't recommend doing that.
Read the transcript
So in my last video I explained how you can save money by buying points, however it's not always the smartest thing to do depending on the scenario. One thing you have to consider is your breakeven point. How many months or years is it going to take you to make that money back? So when somebody asks me if they should buy points I always ask them these two questions. How long do you plan on owning this home? If you're not planning on owning this home for very long then no, absolutely do not buy any points. However if you're planning on keeping this home long term then maybe it might make sense to buy points. Question number two is what do you think is going to happen to rates in the future? If you think rates are going to go down in the future then don't buy points. Why would you pay extra cost up front for a lower rate that you're more than likely going to be able to get for zero points in the future? If you're going to keep the home long term and if you think rates are going to go down then do the opposite. Take an even higher interest rate. Just like buying points down you pay extra cost up front to get the lower interest rate, if you take an above par rate, a higher interest rate, you can actually get the bank to give you money back and you can use those credits, we call them rebate or discount points, you can use those to cover your other costs, even your taxes and insurance. So that's how you can get the bank to cover your taxes and your insurance on your purchase. If you have any questions about this or want me to run the scenario for you for your specific scenario, send me a message, let's talk.
How Shawn approaches points
Shawn prices the same loan three ways, no points, one point and a lender credit, and compares them over the time you actually expect to keep the loan. In his second video he puts it plainly: if you don't plan to own the home for long, don't buy points, and if you expect rates to fall, don't pay extra upfront for a rate you may be able to get later without points. In that case he looks at the opposite trade, an above-par rate whose lender credit can cover other closing costs.
Questions people ask
How much does one mortgage point cost?
One point equals 1% of the loan amount. On a $400,000 loan that is $4,000; on a $760,000 loan it is $7,600.
How much does one point lower the rate?
There is no fixed amount. The reduction depends on the lender, the loan program and market pricing that day, so ask for the exact rate with and without points on the same Loan Estimate.
Are mortgage points tax deductible?
Points paid to buy a primary residence can be deductible for some borrowers who itemize, and points on a refinance are generally deducted over the life of the loan. Ask a tax professional about your situation.
Is it better to pay points or make a bigger down payment?
They solve different problems. A bigger down payment lowers the balance and can remove mortgage insurance; points lower the rate. Compare both over the same holding period.
Do points make sense if I plan to refinance?
Usually not. A refinance ends the loan, so the points stop saving you money. If you might refinance before the break-even month, the cost is likely lost.
Sources
- CFPB: How should I use lender credits and points (also called discount points)?
- CFPB: Loan Estimate explainer
- IRS Topic No. 504: Home mortgage points
- CFPB Compare and negotiate your loan offers
Checked November 1, 2026. Rules, limits and program terms change; confirm current details before you rely on them. Educational information, not a commitment to lend or a determination of eligibility.