Break-Even Formula

The break-even is the month when the cumulative payment savings from a lower rate finally equals what you paid for the points. The math is simple: break-even months equal the total point cost divided by the monthly payment reduction. If a point costs $3,000 on a $300,000 loan and lowers the payment by about $50 a month, you break even at about 60 months, roughly 5 years. Every month past that point is money in your pocket; every month before it is unrecovered cost. That is why points are a bet on how long you will hold the loan, not on where rates are going.

The meaning: points are not a discount, they are a prepayment of interest. The lender gives you a lower rate in exchange for cash up front, and the break-even tells you when that trade pays off.

The real-world consequence: if you sell or refinance before break-even, the points were a donation. If you stay past it, every payment after that line is savings you keep.

Worked Examples by Loan Size

The same point behaves differently at different loan sizes. On a $200,000 loan, one point costs $2,000 and might cut the payment by about $30, giving a break-even near 5.5 years. On a $400,000 loan, one point costs $4,000 and might cut the payment by about $60, with the same 5.5-year break-even, because the cost and the savings scale together. The constant is the rate reduction, generally around 0.25% per point. Loan size changes the dollar amounts but not the time horizon, which is why the holding period, not the loan amount, is the deciding factor.

The money consequence: the dollars at stake grow with the loan, but the timeline does not. A bigger loan does not make points a better bet, it just makes the bet bigger.

The real-world play: run the break-even at your actual loan size before you commit, because the answer changes with every dollar of the loan and every eighth of a point of rate.

Break-Even Chart

Think of the break-even as a line on a chart that starts below zero and climbs over time. In month one, you are in the red by the full cost of the points. Each month, the gap narrows by your payment savings, and the line crosses zero at the break-even month. Before the crossing, selling or refinancing forfeits part of the point cost. After the crossing, every payment is pure savings, and the longer the line runs, the bigger the total gain. I build this chart for every client with real numbers: your loan amount, your actual rate quote, and the true point cost, not a generic rule of thumb.

The real-world consequence: the chart makes the decision visual. You can see exactly which month the points stop costing you and start paying you, and that month is the number that matters.

Practical Application

In practice, I ask one question before recommending points: how long do you plan to live in this home and keep this loan? If the answer clears the break-even, points usually make sense. If it is close, I test a half point or a lender credit instead. For buyers who may relocate for work or anyone unsure about tenure, the safer move is usually the smaller buydown or no points, because a fast refinance can still capture a better rate later without paying point money you might not get back.

Make it a great one, Patriot Nation. The break-even is not a guess, it is arithmetic. Know your holding period, run the months, and let the line decide whether the points earn their keep.