How Mortgage Points Change a $400,000 Loan Payment: 4 Facts

Mortgage points let a borrower trade cash at closing for a lower interest rate and a smaller monthly payment. The Consumer Financial Protection Bureau (CFPB) describes them as discount points: pay more up front, receive a lower rate, and pay less each month. Whether that trade is worth it depends on one number, the break-even month, and this guide builds it from four facts.

Fact 1: One point is one percent of the loan

The CFPB states the definition plainly: one point equals one percent of the loan amount. On a $100,000 loan, one point costs $1,000. On a $400,000 loan, one point costs $4,000. Points do not have to be round numbers, because lenders can quote fractions of a point, and points are paid at closing as part of closing costs.

That percentage structure is what makes points scale with the loan. The same one-point quote costs four times as much on a $400,000 loan as on a $100,000 loan, and it buys a rate reduction on a balance four times as large. Both sides of the trade grow with the loan amount.

The table shows the trade on a $400,000, 30-year fixed loan. Paying $4,000 for one point lowers the rate from 7.00% to 6.75% and the monthly payment by $66.82. The example assumes the lender quotes a 0.25% reduction per point, which is an illustration. Actual reductions vary by lender, loan type, and market conditions.

Fact 2: The CFPB's own example shows the mechanics

The CFPB publishes a worked tradeoff for a $180,000, 30-year fixed loan at 5.0% with zero points. In the points row, the borrower pays $675 more in closing costs (0.375 points) in exchange for a lower rate of 4.875%, and the monthly payment is $14 less each month. In the lender-credit row, the borrower accepts a higher rate of 5.125% in exchange for $675 toward closing costs, and pays $14 more each month.

Two details in that example deserve attention. First, the point fractions are small, because lenders price in fractions of a point, not just whole points. Second, the monthly savings look modest until they are multiplied across the years the loan is actually kept, which is exactly what the break-even calculation does.

Fact 3: The break-even month decides the answer

Divide the upfront cost by the monthly savings. In the $400,000 example, $4,000 divided by $66.82 per month gives a break-even near month 60, about five years. Keep the loan longer than that and the points save money overall; sell or refinance sooner and the upfront cash never pays back.

This is the step most buyers skip. Points look attractive as a lower rate on the quote, but the rate only matters while the loan exists. A buyer who expects to move in three years should be skeptical of points, while a buyer settling in for the long term can treat the upfront payment as prepaid interest that the monthly savings gradually repay.

Put two timelines side by side. Keep the $400,000 loan for the full 30 years and the 6.75% rate lowers payments by about $24,000 in total compared with 7.00% (360 months at $66.82), far more than the $4,000 paid for the point. Sell after three years and the savings total only about $2,400, which never recovers the $4,000. The break-even near month 60 is the line between those two outcomes.

A quick sanity check helps before any quote is accepted. Multiply the monthly savings by the number of months you expect to keep the loan and compare the result with the cash paid for points. If the savings do not clearly exceed the cost, the points are not earning their keep.

Fact 4: Follow the three-step check before you pay

First, get quotes in writing for the same loan from the same lender at zero points and with points. Points are listed on your Loan Estimate and on your Closing Disclosure on page 2, Section A, so confirm the line items match the quote.

Second, compute the break-even with your own numbers: points cost divided by monthly savings. Use the actual rate reduction the lender offers, not a rule of thumb, since the reduction per point varies. If the lender quotes a different reduction than the 0.25% used in the example above, the monthly savings and the break-even both change.

Third, weigh the cash against its alternatives. The $4,000 for points could instead sit in an emergency fund, reduce the loan balance at closing, or cover moving costs. Points tend to make sense when the buyer plans to keep the loan well past break-even and has cash to spare after closing; otherwise the same dollars may work harder elsewhere. Keep the paperwork organized too, because two quotes that look different may simply combine rate and points differently.

Before you sign

Shop more than one lender. The CFPB advises requesting multiple Loan Estimates from different lenders so you can compare, and offers are structured differently from one lender to the next. Ask every lender exactly how much the rate moves per point, and get the zero-point version of each offer so the comparison is clean.

Also ask whether the lender offers a lender credit option, as in the CFPB example, since taking a slightly higher rate in exchange for closing-cost help is the mirror image of buying points. The math in this article uses a fixed-rate example and covers principal and interest only, so taxes, insurance, and HOA dues are excluded. Adjustable-rate loans reset the tradeoff on a different schedule, so rerun the break-even against the fixed period you actually expect.

This article is for general information, not financial advice.

Sources

• CFPB, How should I use lender credits and points (also called discount points)?
• CFPB, Loan Estimate explainer