Should You Pay Mortgage Points? The Break-Even Month, By Hand

A lender will often let you pay an upfront fee — points — in exchange for a lower rate. The pitch is simple: pay now, save every month after. The question that actually matters is when the monthly savings pay back the fee, and the calculation almost everyone reaches for first gets that answer wrong.

The naive method, and why it's wrong

The obvious approach: divide the fee by the monthly saving. Fee $6,000, saving $97.55 a month, $6,000 ÷ $97.55 = 61.5 months — just over five years. That number only tracks cash paid out of pocket. It ignores that the two loans are also paying down the loan balance at different speeds, and if you sell or refinance, whatever balance you still owe is money that leaves your pocket too.

The correct method: compare running totals, not just cash spent

At any month, the true cost of a loan so far is: fees paid, plus every payment made up to that month, plus the balance you'd still have to pay off if you stopped today. Break-even is the first month where the option with the fee has a lower running total than the option without it — not the month where cash paid so far happens to match.

Worked example: $300,000, 30 years, two offers

Offer A: 6.5%, no points. Offer B: 6.0%, with $6,000 in points and fees. Both borrow $300,000 over 30 years (360 months). Standard amortization, with r as the monthly rate (annual rate ÷ 12): payment = balance × r ÷ (1 − (1 + r)^-360). Run that for each rate:

• Offer A (6.5%): $1,896.20 a month.
• Offer B (6.0%): $1,798.65 a month.

Offer B saves $97.55 a month. Divide its $6,000 fee by that saving and you get the naive 61.5-month estimate above. Now do it correctly: amortize both loans month by month and add fees, payments-to-date and remaining balance.

At month 47: Offer A has paid $89,121.40 and still owes $285,528.56, a running total of $374,649.96. Offer B has paid its $6,000 fee plus $84,536.55 in payments and still owes $284,221.19, a running total of $374,757.74 — still $107.78 more expensive than A.

At month 48: Offer A has paid $91,017.60 and owes $285,178.97, total $376,196.57. Offer B has paid $6,000 plus $86,335.20 and owes $283,843.65, total $376,178.85 — now $17.72 cheaper than A. The break-even month is 48 — four years — not the 61.5 months the naive fee-over-savings math suggested, a difference of about thirteen and a half months.

Why the correct answer comes in earlier

Offer B's lower rate also pays down principal faster every month, since less of each payment goes to interest. By month 48 it owes $1,335.32 less than Offer A on the same original loan. That's real money you'd get back the moment you sold the house or refinanced, and the naive fee-over-savings method throws it away entirely by counting only cash paid, never balance owed.

The other side of it

If you expect to move or refinance before month 48, Offer A — the one with no points — is cheaper for you, even with the higher rate; you'd have paid a $6,000 fee for savings you never collected. Only past the break-even month does paying points win, and if you keep the loan the full 30 years the gap widens to $29,118 in Offer B's favor.

What the tool adds

The formulas above are everything the method needs for two offers. The free Loan Side-by-Side tool takes up to four pasted offers at once, runs the full amortization for each in whole cents so the totals reconcile exactly, and finds the break-even month against every cheaper-upfront alternative automatically — entirely on your device.