# Mortgage points vs. down payment: How should I look at the break even point?

Some relevant questions are here:

What are points on a mortgage?

Should I pay points on my mortgage?

First Time Home Buyers - Down Payment, PMI and Points

I am aware that most people look at the break even point and the time they intend to keep the loan to decide whether to pay points or not. This method usually assumes a constant down payment. As an example, a \$250,000.00 home would be compared like this (assume for now constant closing costs besides points):

``````Down       Points   Rate   Upfront
50,000     1.0      3.875  52K
50,000     0.0      4.000  50K
``````

In this case we would like to know when we recover the money spent on points (the break even point).

Isn't a better way to look at this is to compare the following?

``````Down          Points   Rate   Upfront
47,979.80     1.0      3.875  50K
50K           0.0      4.000  50K
``````

When I look at my actual numbers (not those shown here) it seems like it is always worth to pay points. Is this a correct way of thinking?

Update: Using Jesse's numbers below we have the following:

``````Down          Points   Rate   Upfront  Mnth.Pymnt. Total Cost
47,979.80     1.0      3.875  50K      949.97      \$391,989
50K           0.0      4.000  50K      954.83      \$393,738
``````

Classic break even analysis would go something like this. We save \$4.86 every month. To make up for the point (\$2,020.00) then I would need to keep this loan for 416 months, longer that the term of the loan. I argue that the total cost of the home with the point is lower than without it as can be seen in the last column of the table. How do we reconcile these two calculations? Please assume that all the costs involved are the point, principal (including down payment), and the interest charged (so no mortgage insurance at this point).

• The second way of looking at it has a problem, \$47.979.80 is only 19.19% so you will have to pay PMI. Thus increasing your monthly payment. Mar 28, 2013 at 2:17
• @mhoran_psprep - You may not have to pay PMI if it is not an FHA Loan. You have to caluclate the costs of taking the point versus the entire cost of the loan. I was able to buy a partial point for 400 on my mortgage that returned double in the first year in savings on my mortgage and had a 1700% Return on the life of the loan. The next bump would have cost me 1500 and would have had a 150% return on the life of the loan(30 years)... so it was not worth it.
– user4127
Mar 28, 2013 at 15:12
• @mhoran_psprep you are right. I did not realize that my example had that problem. Assume for now that PMI is equivalent in both cases (for the sake of the question). Mar 28, 2013 at 18:00
• If PMI is moot at the level of down payment you are interested then then it makes sense to put down a little less and go with a point to reduce your rate. Apr 1, 2013 at 2:06

It depends on how long you plan to stay in the house. If you end up having a few kids and need to buy a larger house in five years, you may not have recouped your expense from buying points in that short time frame.

If you are buying a house and have full intention of staying there throughout the life of the loan, then it would almost always make sense to buy points.

Just look at your break even point and ask yourself if you really think you'll still be in the house at the break even point.

When I bought my house I used your "second method," keeping the upfront costs constant. I agreed that made more sense and I ended up buying one point.

• Hmm. But how do you define a break even point with the second method if you have the same up front costs? With the traditional definition of the break even point, it is 0 months for the second methods. Mar 27, 2013 at 22:35
• I'm confused by what you mean. As you pay more in points, your down payment goes down. You have to weigh the balance of paying for points vs. paying more for down payment. For example, 40k down with 10k in points will have a different break even point than 50k down and 0 points. Just as 30k down and 20k in points will have a different break even point. These are just examples, but you have to plug the numbers and decide for yourself which is the best scenario for you. Don't forget PMI as well; if you drop below 20% down you will begin to owe PMI payments. Mar 28, 2013 at 0:12
• the break even point is typically calculated when using method one. If I have a fixed down payment... how many monthly payments do I need to keep the loan to recover the point. Am I wrong? The break even point is only valid when comparing to distinct options. Mar 28, 2013 at 18:03
• Go to any mortgage calculator and do your own break even analysis. \$200k @ 4% is 954.83 (your 250k purchase price with 50k down, not counting insurance and tax escrow). \$202,020.20 @ 3.875% is 949.97. You saved \$4.86 each month by buying points. The points cost you \$2,020.20, so it will take you 415 months (\$2020.20 / \$4.86) to break even, which is longer than your whole term. Therefore, buying points is not a good idea in this situation. Mar 28, 2013 at 21:03
• That makes sense, but still. With your numbers the total cost of the house for the 4% loan is (50K+954.83*360)=\$393,738 out of which \$143,738 are interest. For the 3.875% loan we have (\$47,980+\$2,020+949.97*360)=\$391,989 out of which \$2,020 is the point and \$139,969 is interest. So buying the point saved (\$143,738-\$139,969-\$2,020)=\$1,749. A negligible amount during 30 years but still a saving. Where is my logic (or math) failing me? Mar 28, 2013 at 23:08

Look at it this way, a point is \$2000 on the \$200K loan. But, it also buys you a lower rate, resulting in a lower payment. Take the lower payment difference and divide into \$2000 to get the months it will take to break even.

To make matters more complex, you can account for the after tax effect of all number involved.

The number of months you find is the break even is how long you must hold the mortgage for the points to have been worth paying.

By the way, your numbers show a choice of \$954.83 or \$940.47 for the two rates. A \$14.36 savings and 139 months to break even. Over 11 years? A point usually buys the rate down much more than that. I hope these were made up numbers for sake of discussion.

• I understand this. But how do you decide when using method two. You are paying the same amount upfront, once with a point, once without it (the amount of the loan decreases when not using a point). It seems your monthly payment will always be lower in the case of the point (i.e. investing in points lowers your monthly payment more than increasing your down payment). Mar 28, 2013 at 18:08
• Also, you are right. I was assuming that 1 point would get me a 1/8% of a decrease, but my loan officer notified me that a full point will get me 1/4%. I think it varies from institution to institution. Mar 28, 2013 at 18:22