Formula: Cost of points / Monthly savings = Breakeven in months. If breakeven < how long you will keep the loan buy the points. Example converting to years: 67 months / 12 = 5.6 years.
Worked Examples
00K loan: 1 point = ,000. Rate reduction 0.25%. Savings 0/month. Breakeven: ,000/0 = 67 months (5.6 years). 50K loan: 1 point = ,500. Savings 0/month. Breakeven: 70 months (5.8 years).
Breakeven Chart
Breakeven points vary: 1 point typically breaks even in 4-7 years. 2 points = 6-9 years. 3 points = 8-12 years. The more points you buy the longer the breakeven period.
Comparison to Investing
Instead of buying points consider investing the money. ,000 invested at 7% for 30 years = 0,000. Compare to 0/month savings on mortgage = 1,600 total savings. Investing wins in this example.
When to Buy
Buy points when: you plan to keep the loan 7+ years you have extra cash at closing and you want lower monthly payments. Best for long-term homeowners who want predictable payments.
When to Skip
Skip points when: you plan to sell or refinance within 5 years you need cash for other closing costs or better investments earn higher returns than the rate reduction saves.