Mortgage Points: Should You Buy Down Your Rate?
Mortgage points let you pay upfront to lower your interest rate. Typically, one point costs 1% of your loan amount and reduces your rate by about 0.25%. Whether buying down your rate makes sense depends on how long you plan to stay in the home and how much cash you have at closing. For most buyers in New Hampshire and beyond, the math is straightforward once you know your break-even point.
Why Mortgage Points Matter Right Now
With interest rates still elevated compared to the historic lows of 2020-2021, many buyers in 2026 are looking for every tool available to reduce their monthly payment. Buying down your rate with discount points is one of the oldest strategies in mortgage lending and one of the most misunderstood.
In New Hampshire's housing market, where median home prices have remained competitive, even a 0.25% rate reduction can mean real money over the life of a loan. But points aren't free, and paying for them upfront only makes sense in the right circumstances. Understanding exactly how they work will help you make a smarter decision at the closing table.
What Are Points on a Mortgage, Exactly?
Mortgage points, also called discount points, are prepaid interest. You pay them at closing in exchange for a lower interest rate on your loan.
Here's how the math works:
One discount point equals 1% of your loan amount. On a $400,000 mortgage, one point costs $4,000. In most cases, one point reduces your interest rate by approximately 0.25%, though this varies by lender and loan type. Two points would cost $8,000 and reduce your rate by roughly 0.50%.
Origination Points vs. Discount Points
These are not the same thing. Origination points are fees a lender charges to process your loan and they don't lower your rate. Discount points are the ones that actually buy down your rate. Always ask your loan officer which type is on your Loan Estimate so you're comparing apples to apples.
Are Mortgage Points Tax Deductible?
In many cases, yes. According to the IRS, discount points paid on a home purchase mortgage may be fully deductible in the year you pay them, provided you meet certain conditions. Points paid on a refinance are typically deducted over the life of the loan. Speak with a tax professional to confirm your situation. This is one of the few upfront mortgage costs that can come back to you at tax time.
How to Calculate Your Break-Even Point
The break-even point is the number of months it takes for your monthly savings to equal what you paid upfront. This is the most important number in the mortgage points decision.
Break-Even Formula:
Cost of Points divided by Monthly Payment Savings = Break-Even in Months
Example:
Loan amount: $380,000
One point costs: $3,800
Rate without points: 7.00%, monthly payment (P&I): approx. $2,529
Rate with one point: 6.75%, monthly payment (P&I): approx. $2,465
Monthly savings: $64
Break-even: $3,800 divided by $64 = roughly 59 months (just under 5 years)
If you stay in the home beyond 5 years, buying the point saves you money. If you sell or refinance before then, you lose money on the deal.
When Buying Points Makes Sense
You plan to stay in the home 7 or more years
You have cash reserves beyond what's needed for your down payment and emergency fund
You want the lowest possible monthly payment for budgeting purposes
You're in a higher tax bracket and can benefit from the deduction
When Buying Points Doesn't Make Sense
You're a first-time buyer stretching to cover closing costs
You expect to move or refinance within 3 to 5 years
You'd have to drain your savings to pay for them
Your break-even period exceeds your likely time in the home
How to Apply This at the Closing Table
Once you know your break-even, you can negotiate from a position of knowledge. Here's how to approach the conversation:
Step 1: Get your Loan Estimate first. Your lender is required to provide this within three business days of your application. It will show the exact cost of points and the rate they buy you.
Step 2: Run the break-even calculation using your specific numbers, not a generic example.
Step 3: Compare scenarios. Ask your loan officer to show you the payment at zero points, one point, and two points side by side. Some lenders offer fractional points (0.5 points, 1.5 points), so ask for those scenarios too.
Step 4: Factor in your cash reserves. Your emergency fund should remain intact after closing. If buying points would leave you cash-thin, that's a real risk, especially in the first year of homeownership when surprises happen.
Step 5: Revisit the question if rates drop. If you buy points now and rates fall significantly within a year or two, you may refinance, which resets your break-even clock. That's not a reason to avoid points, but it's a variable worth acknowledging.
You can explore your fixed-rate mortgage options or adjustable-rate mortgage alternatives to see how rate structure interacts with the points decision.
Disclaimer: This content is for educational purposes only and does not constitute financial advice. Loan programs, rates, and eligibility requirements are subject to change. NextGen Mortgage Loans is licensed in NH (NMLS# 1621958), MA (MB1621958), ME (1621958), and FL (MBR4542). Contact a licensed loan officer to discuss your specific situation.
How NextGen Mortgage Loans Can Help
At NextGen Mortgage Loans, we don't run your scenario through an algorithm and hand you a take-it-or-leave-it rate sheet. Every borrower gets a real loan officer, someone who will walk you through the points math for your specific loan amount, your actual timeline, and your cash position.
We're based in Nashua, New Hampshire and licensed in NH, MA, ME, and FL. Our 14-day closing timeline means you won't be sitting in uncertainty while the market moves. Whether you're buying your first home in Manchester or refinancing in Portsmouth, we'll show you exactly what each rate option costs and what it saves, so you can decide with confidence. Schedule a strategy call or start your application here.
Frequently Asked Questions
What are mortgage points and how do they work?
Mortgage points, also called discount points, are upfront fees you pay at closing to lower your interest rate. One point equals 1% of your loan amount and typically reduces your rate by about 0.25%. The more points you pay, the lower your rate, but the higher your closing costs.
Is it worth it to buy down your mortgage rate?
It depends on your break-even point. Divide the cost of the points by your monthly savings. If you'll stay in the home longer than that break-even period, buying points saves you money. If you expect to sell or refinance sooner, you'll likely lose money on the deal.
How much does one mortgage point cost in 2026?
One point costs 1% of your loan amount, regardless of the lender. On a $350,000 loan, one point costs $3,500. On a $500,000 loan, it costs $5,000. The rate reduction you get per point varies by lender and current market conditions, so ask for the exact figures on your Loan Estimate.
Can I deduct mortgage points on my taxes?
Discount points paid on a home purchase loan are often fully deductible in the year you pay them, per IRS guidelines, if you meet the qualifying conditions. Points on a refinance are typically deducted over the loan's life. Consult a tax advisor for your specific situation.
What's the difference between origination points and discount points?
Origination points are lender fees that cover loan processing and do not lower your rate. Discount points are prepaid interest that actually buys down your rate. Both appear on your Loan Estimate, so always ask which type you're looking at before comparing offers.
The Bottom Line
Mortgage points are a tool, not a default. If you're planning to stay in your home for seven or more years and have the cash reserves to cover the upfront cost, buying down your rate in 2026 can save you thousands over the life of the loan. If you're uncertain about your timeline, keep the cash and put it toward your reserves instead. Run your break-even number, compare your scenarios, andtalk to a NextGen loan officer before you decide.
