Should You Pay for Mortgage Points When You Refinance?

Mortgage rates have risen in the past few years, peaking at around 7.8% in late 2023, and closer to the 7% mark recently. In response, many homeowners refinancing their loans have considered buying mortgage points to reduce their interest rate. 

In fact, nearly 9 out of 10 cash-out refinance borrowers in 2023 paid upfront points to lower their rate.

But whether you should buy mortgage points when you refinance depends on your financial goals, how long you’ll keep the loan, and a cost-benefit analysis. 

Key Takeaways:

• 1 point = 1% of the loan balance = 0.25% reduction in interest rate
• Buying points can reduce your monthly payment and total interest but only pays off if you stay in the loan past the break-even point.
• If you expect to move, refinance soon, or have better uses for the money, skipping points (or even using lender credits) may be the smarter choice.

What Are Mortgage Points?

Mortgage points (or discount points) are an optional upfront fee you pay to your lender at closing in exchange for a lower interest rate on your mortgage. 

“What are points on a mortgage refinance?” is a common question among homeowners looking to reduce their interest rate. Essentially, you’re prepaying some interest to “buy down” your rate and reduce your monthly payments over the life of the loan. 

One point usually costs 1% of your loan amount and typically lowers the interest rate by about 0.25%, though the exact rate reduction per point can vary by lender and market conditions.

So, for example, let’s say you’re refinancing a $250,000 mortgage at a 7.00% rate. One point would cost you $2,500 and might reduce your rate to approximately 6.75%, lowering your monthly principal and interest payment by about $43.

How we source rates and rate trends

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Rate data in the charts and tables above comes from RateUpdate.com. The displayed rates come from multiple providers and represent market averages. Your mortgage rate will differ based on individual factors like your credit score as well as differing loan types and terms offered by lenders.

How Mortgage Points Work When Refinancing

When you refinance, buying points works the same basic way as with a purchase mortgage: you pay an upfront amount at closing to get a lower interest rate on your new loan. 

This can save you a significant amount of interest over time, but it increases your refinance closing costs initially. 

Buying refinance points can lower your monthly payments, which is great if you plan to stay in the home long-term. But if you expect to sell or refinance sometime in the near future, you likely won’t save money (or end up paying more).

So basically, knowing what points mean on a mortgage refinance helps you weigh upfront costs against long-term savings.

Let’s say you’re refinancing a $325,000 loan. Your lender offers a 30-year fixed rate of 6.875% with no points, or you could pay 2 points (2% of the loan, which is $6,500) to get a 6.375% rate. Here’s how the numbers might compare:

Scenario	No Points (0%)	With 2 Points (2%)
Interest Rate	6.875%	6.375%
Upfront Points Cost	$0	$6,500
Monthly P&I	$2,138	$2,033
Monthly Savings	–	$105
Total Interest (30 yrs)	$444,000	$406,880
Interest Saved	$0	~$37,120 over life
Break-Even	–	~62 months (just over 5 years)

In this example, paying $6,500 for 2 points lowers the monthly payment by $105 and would save nearly $37,120 in interest if you kept the loan for 30 years. However, you’d need to stay in the loan for about 5 years and 2 months to recoup the upfront $6,500 (aka, the break-even point). If you sold the home or refinanced again before ~62 months, the points would end up losing you money.

Check out our refinance break-even calculator to see what your break-even point might be.

Mortgage Points for Cash-Out Refinances

If you’re doing a cash-out refinance, you’ll typically face higher interest rates than a standard rate-and-term refinance. 

Many cash-out refinancers choose to pay points to offset that higher rate, and lenders may even allow you to deduct the points cost from your cash-out funds, effectively rolling it into the new loan.

But be careful. Using the loan proceeds to pay points is essentially borrowing money to prepay interest, which can dilute the benefit. 

You’d need the lower rate to compensate for the higher principal balance. 

Factoring Mortgage Points Into Your Refinance Break-Even Point

Before buying points, you must calculate your break-even point, which is the time it takes for the monthly savings from a lower rate to repay the cost of the points. 

If you keep the loan beyond the break-even, you’ll come out ahead; if you sell or refinance sooner, you’ll lose money. This concept is so important that experts recommend only paying for points if you’re confident you’ll keep the loan past the break-even.

How to calculate break-even: divide the cost of the points by the monthly savings they generate.

Break-Even (Months) = Cost of Points / Monthly Payment Savings

Using the earlier example, paying $6,500 in points saved about $105 per month, so the break-even was roughly $6,500 ÷ $105 ≈ 62 months (just over 5 years). If you had paid just $3,250 for 1 point and saved around $52 a month, the break-even would also be about 62 months. 

In general, many point-buydowns on 30-year loans tend to have break-even periods of 4 to 7 years, depending on loan size and rate difference.

Let’s look at two refinance scenarios side by side to illustrate (rates and fees are for example purposes only):

• Refinance A (No Points): Refinance $325,000 at 6.875% with zero points. Assume closing costs (without points) are, say, $5,000. Your new monthly payment would be about $2,138 (principal & interest). You paid no points, so your only upfront costs are the standard closing fees.
• Refinance B (With Points): Refinance $325,000 at 6.375% by paying 2 points ($6,500) upfront, in addition to the same $5,000 in other closing costs. Your new monthly payment would drop to roughly $2,033. You paid a total of $11,500 at closing ($5k fees + $6.5k points).

Monthly savings in scenario B vs A is approximately $105. To recoup the $6,500 spent on points, it would take about 62 months of $105 savings ($6,500 / $105 = 61.9). After just over 5 years, you’d start coming out ahead by having paid points. If you refinance or sell before then, scenario A (no points) would have been cheaper.

Refinance Points Pros and Cons

Paying points on a refinance comes with both advantages and disadvantages.

Pros

• Buying points lowers your interest rate, which reduces your monthly payments and the total interest paid over time.
• A lower monthly payment from a reduced rate can improve your debt-to-income ratio and make it easier to qualify for a refinance.
• If you keep the loan long enough, the savings from buying points can far exceed the upfront cost.
• Refinance points may be tax-deductible, either all at once or spread over the life of the loan.

Cons

• Paying for points adds to your closing costs and ties up cash that could be used for other financial priorities.
• If you refinance or sell before hitting the break-even point, you’ll lose money on the points you paid.
• Buying points limits your flexibility if interest rates drop or your plans change, and you need to refinance again.
• The money used for points might yield more value if used to pay down debt, invest elsewhere, or strengthen your financial safety net.
• On smaller or shorter loans, the dollar savings from a lower rate may be too minor to justify the upfront cost of points.

When Paying Points on a Refinance Might Make Sense

Buying points isn’t universally good or bad because it depends on your situation. Here are some situations where paying points may be good:

• If you plan to stay in the home long enough to reach the break-even point.
• If you have enough cash to cover closing costs and points without compromising your financial cushion.
• In a high-rate environment, points can lower your interest rate enough to make refinancing feasible or more affordable.
• If you need a specific interest rate to qualify for the refinance or meet a savings goal.
• If you own rental or investment properties and refinance, points may give you tax advantages and long-term cash flow improvements if you plan to hold the property.

When Paying Points May Not Be Worth It

Situations where buying points is probably not worth the cost:

• If you might move or refinance within a few years.
• If your budget is tight, you may need to dip into emergency funds.
• When the break-even period lasts beyond 7 years.
• On smaller loans or when the rate reduction is minimal.
• If you have higher-interest debt or urgent expenses, your money may be better spent elsewhere than buying points.
• If rates may drop soon, or you’re already getting a big rate reduction.

Tax Implications for Refinance Points

Refinance points are considered prepaid interest by the IRS, which will affect your income tax deductions.

1. When you buy or build a home and pay points on the initial mortgage, the IRS often allows you to deduct those points in full for that tax year (provided certain conditions are met). 
2. Points paid as part of a refinance are not fully deductible in the year you pay them, meaning you’ll have to amortize the deduction over the life of the loan.
3. If part of your refinance was used to substantially improve your primary home (like a cash-out refi where the cash is used for renovations), the IRS may allow you to deduct that portion of points in the current year.
4. If you refinance the loan again or pay it off early, the IRS lets you deduct the remaining undeducted points in the year of the payoff/refi. Usually, any leftover undeducted points can be deducted when the loan ends.
5. If you refinanced a loan on a rental or business property, points are deductible as a business expense, often fully in the year paid, since it’s not an itemized personal deduction. 

Always check with a licensed tax professional before filing. 

Mortgage Points and Adjustable-Rate Mortgages (ARMs)

Most ARMs have a fixed-rate period (e.g., 5 years on a 5/1 ARM), after which the rate adjusts. Paying points on an ARM generally only reduces your interest rate during the initial fixed period and does not guarantee a lower rate over the life of the loan. So it only makes sense to buy points if you can break even during the initial fixed-rate period, often around 30 to 40 months. 

Lender Credits: The Opposite of Points

If buying points means paying more now to get a lower rate, lender credits are the exact opposite: you accept a higher interest rate to pay less (or nothing) at closing. A lender credit is essentially money the lender gives you toward closing costs, in exchange for charging a higher rate on the loan.

It’s often described as “negative points.” On loan estimates, a credit might be shown as -1 point, meaning you get 1% of the loan amount back to cover costs, but your rate will be higher.

While that may not sound ideal, it can be a good strategy if you want to minimize upfront costs or you know you won’t keep the loan for long. 

For instance, if you might move in a couple of years, taking a slightly higher rate with no closing costs could save you thousands now. You won’t be paying the loan long enough for the extra interest to add up to more than that.

Questions to Ask Before You Buy Points

Before you commit, it’s important to understand the points involved in a mortgage refinance and how they fit into your bigger financial picture.

What’s my break-even point if I buy points?

Have the lender help calculate how many months of lower payments it will take to recover the cost of the points. Does that timeline align with how long you intend to keep the mortgage? If not, it’s probably not worth it.

Do I have the cash, or would I need to roll it in?

If you don’t have the cash, rolling it in means paying interest, which diminishes the benefit. And if paying the points leaves you cash-poor, that could be risky financially. 

Will my monthly savings outweigh the upfront cost?

If you spend $5k to save $50 a month, is it worth waiting ~100 months (over 8 years) to start seeing net savings? Make sure the monthly savings are worth the upfront cost and that the break-even timeline fits your budget and how long you’ll keep the loan.

Am I better off using the money elsewhere (e.g., debt, home repairs)?

If the money could make a bigger impact elsewhere (like paying off high-interest debt or funding home repairs), do that before using it for points.

Points Can Pay Off – But Only in the Right Situations

Refinance points let you ‘invest’ upfront to secure a lower rate, but they only pay off if you stay in the loan long enough.
Now that you understand how they work, get started with Refi.com to receive a quote with and without points. From there, you can compare options, and take the next step toward a smarter refinance.