Quick Answer
Paying discount points lowers your interest rate by 0.125-0.25% per point, with break-even typically occurring in 4-7 years depending on loan size and rate reduction. On a $300,000 loan, 2 points ($6,000) reducing rate from 7.5% to 7.0% breaks even in ~5 years. Choose points for long-term holds, preserve cash for shorter holding periods or higher-yielding investments.
Key Takeaways
- 1 point = 1% of loan amount and typically reduces rate by 0.125-0.25%
- Break-even formula: Points Cost ÷ Monthly Savings = Months to Break-Even
- Long-term holds (7+ years) favor points: Rate savings compound over time
- Short-term holds (3-5 years) favor higher rate, lower upfront cost—preserve cash for next down payment
- DSCR impact: Lower rate improves DSCR, potentially qualifying you for higher loan amounts
FAQ
Q: When does paying points make sense? A: If you plan to hold the loan past the break-even point (typically 4–7 years), paying points reduces your total cost. For short holds, keep the cash.
Q: How much is each point worth? A: One point costs 1% of the loan amount and typically reduces your rate by 0.125–0.25%. Calculate your specific break-even.
Q: Are points tax-deductible? A: Points on investment property loans are generally amortized over the loan term, not deducted immediately. Consult your tax advisor for specifics.
Next Step
Use the DSCR Calculator to run points vs rate scenarios and find your personal break-even timeline.