Here is a simple decision tree to decide whether to buy points. Ask these 5 questions in order: 1) How long do you plan to keep the loan? 2) Can you afford the upfront cost? 3) What is the break-even period? 4) Are there better uses for your cash? 5) Are rates high enough for points to matter?
Decision Tree
Step 1: How long do you plan to keep this loan? If under 3 years, skip points. If 3-5 years, be cautious and run exact numbers. If 7+ years, points likely make sense. Step 2: Can you afford the upfront cost without depleting reserves? If points drain your emergency fund, skip them. Step 3: Calculate break-even. Divide point cost by monthly savings. If break-even exceeds your expected time in the home, do not buy points.
Decision Examples
Example A: $300K loan, 7% rate. Point costs $3,000, saves $48/month. Break-even = 62 months. If you plan to stay 7+ years, buy the point. If 5 years, skip. Example B: $500K loan, 6.75% rate. Point costs $5,000, saves $78/month. Break-even = 64 months. Similar analysis applies.
Outcomes Summary
Points win when: long hold period, adequate cash reserves, high prevailing rates, and no competing need for the funds. Skip points when: short hold period, tight cash, low rates, or you need the money for repairs, moving costs, or other priorities. Still unsure? Run the numbers both ways and compare the total cost over your expected time in the home.