If you plan to refinance within 3-5 years, buying points may not pay off. Calculate your breakeven. If the breakeven exceeds your planned timeline before refinancing, skip the points. If you plan to keep the loan 7+ years, points usually win. The key is matching the point investment to your expected loan life.
Breakeven vs Refinance Timeline
The breakeven on 1 point is typically 5-6 years. If you refinance in year 3, you lose the upfront point cost. If you refinance in year 7, the points have already paid for themselves. The closer your refinance timeline is to the breakeven, the more carefully you need to calculate.
The Calculation
Compare the point cost to the total savings before refinancing. On a $350,000 loan: 1 point costs $3,500, saves $59/month. If you refinance in 3 years: $59 x 36 = $2,124 savings vs $3,500 cost = net loss of $1,376. If you refinance in 7 years: $59 x 84 = $4,956 savings vs $3,500 cost = net gain of $1,456.
When Points Still Work
If interest rates are high and you expect them to drop in 5+ years, points can still make sense. The savings from points accumulate each month. Even if you refinance, you enjoyed lower payments during that period. Additionally, some lenders offer points that are partially refundable if you refinance with them.
When to Skip Points
Skip points if you are buying with a plan to refinance within 2-3 years. Take the lender credit instead. If rates are expected to drop significantly, you will refinance early and the points will be wasted. Also skip points if your cash reserves are tight.
Alternatives When Refinancing
Instead of buying points, consider a no-point loan with a s ightly higher rate. Look at a temporarty buydown if you expct rates to drop within 2 years. A no-cost refinance where the lender covers costs in exchang for a higher rate may also make sense.
