Mortgage Points vs Bigger Down Payment: Where to Put Cash

Two cash decisions that look similar but aren't

When you have extra cash at closing, two options compete for it: buying discount points to lower your interest rate, or making a bigger down payment to shrink your loan. They feel interchangeable — both reduce your monthly payment — but they work through completely different mechanics and pay off on different timelines.

A discount point costs about 1% of your loan amount and typically lowers your rate by roughly 0.25% (the exact buy-down varies by lender). On a $400,000 loan, one point is $4,000, and you can usually buy fractional or multiple points. Points are prepaid interest: you hand the lender money today in exchange for a permanently lower rate over the life of the loan.

A bigger down payment simply reduces how much you borrow — there's no rate buy-down, just a smaller balance. But if your extra cash crosses the 20%-down threshold, it can wipe out private mortgage insurance entirely, which is a separate and often larger saving than the rate reduction points buy. That PMI difference is what usually tips the decision, so it's the first thing to check before you compare anything else.

The break-even formula for points

Whether points are worth it comes down to one calculation: break-even = cost of the points ÷ monthly savings. Say you're borrowing $400,000 and buy one point for $4,000 to drop your rate from 7.0% to 6.75%. Your payment falls from about $2,661 to $2,594 — a saving of roughly $67 a month.

$4,000 ÷ $67 ≈ 60 months, or 5 years. If you stay in the home and keep the loan longer than 5 years, the point pays for itself and everything after is pure savings — over a full 30-year term that's roughly $24,000 of interest avoided for the $4,000 you spent. If you sell or refinance before the 5-year mark, you lose money on the deal: you paid $4,000 upfront but recouped only part of it through lower payments.

Most points land in a 4–7 year break-even range, depending on how much rate reduction each point buys. The longer your time horizon, the better points look — and the more uncertain your timeline, the riskier they become. One subtlety worth knowing: the break-even above ignores the time value of money and the fact that you could have invested the $4,000 instead. A stricter analysis pushes the true break-even slightly later, which only strengthens the rule that points reward a long, committed stay.

Why a bigger down payment often wins: PMI

The single biggest reason to favor a larger down payment is private mortgage insurance. If you put down less than 20%, lenders typically charge PMI of 0.5%–1.5% of the loan per year — on a $400,000 loan that's $2,000–$6,000 annually, or roughly $167–$500 a month, buying you nothing. PMI protects the lender, not you, against the risk of default on a low-equity loan.

Suppose you're at 15% down and have an extra $20,000. Putting it toward the down payment to reach 20% can eliminate PMI immediately. If your PMI was $200 a month, that's $2,400 a year you stop paying — a guaranteed 12% annual return on the $20,000 you redirected, far faster and more certain than the slow drip of savings from buying down the rate. No discount point comes close to that.

PMI is also harder to shed later than people expect. By law it auto-terminates only once your balance reaches 78% of the original value, and to remove it sooner at 80% you must formally request cancellation — often paying for a new appraisal to prove your equity. Rising home values can help, but you're at the lender's mercy on timing. Avoiding PMI up front sidesteps all of that. The bottom line: when your extra cash gets you across the 20% line, the down payment almost always beats points. Only once you're already past 20% — with PMI off the table — does the points-versus-down-payment math become a closer call.

The 'might move or refinance' tiebreaker

If you're already past 20% down and PMI isn't in play, the decision hinges on how long you'll keep the loan. Points only reward patience. If there's a real chance you'll move within a few years or refinance when rates dip, you may never reach the 4–7 year break-even — making points a poor bet. This is a bigger risk than it sounds: the median American homeowner moves or refinances well within a decade, and a refinance resets your rate entirely, instantly erasing the value of any points you bought on the old loan.

A bigger down payment, by contrast, builds equity you keep no matter when you sell. If you move in year three, that extra $20,000 of down payment comes back to you in the sale proceeds; the $4,000 you spent on points is simply gone. Down-payment dollars are recoverable equity; point dollars are sunk cost the moment you sign.

There's also a tax angle: discount points are often deductible as prepaid interest in the year you buy them (if you itemize and meet IRS rules for a primary residence), which can soften their cost slightly. A down payment offers no such deduction. Still, with the higher standard deduction many filers no longer itemize, so the benefit is smaller than it once was — and it rarely overrides the core logic. Run both scenarios in the calculators below: compute your exact points break-even, then model the down payment that drops you below 80% loan-to-value. As a rule of thumb: PMI avoidance or an uncertain timeline → bigger down payment; a long, settled stay with no PMI and no plan to refinance → points.

Is it better to buy points or put more money down?

It depends on PMI and your timeline. If extra cash gets you to 20% down and eliminates PMI, the down payment usually wins — that's a fast, guaranteed saving. If you're already past 20% down and plan to stay long-term, buying points to lower your rate can save more over the years.

How do I calculate the break-even on mortgage points?

Divide the cost of the points by the monthly savings they produce. One point on a $400,000 loan costs $4,000 and might save about $67 a month, giving a break-even of roughly 60 months — 5 years. Stay past that point and you profit; sell or refinance sooner and you lose money.

How much does one mortgage point cost and save?

One discount point costs about 1% of your loan amount and typically lowers your rate by around 0.25%. On a $400,000 loan, that's $4,000 to cut the rate from, say, 7.0% to 6.75% — saving roughly $67 a month. The exact rate reduction varies by lender and market conditions.

Can a bigger down payment get rid of PMI?

Yes. Putting down 20% or more — reaching 80% loan-to-value — lets you avoid private mortgage insurance entirely. PMI runs 0.5%–1.5% of the loan per year, so crossing the 20% threshold can save thousands annually. This is often the strongest reason to choose a down payment over points.

Should I buy points if I might refinance soon?

No. Points only pay off if you keep the loan past the 4–7 year break-even. If you expect to refinance when rates drop — or move within a few years — you'll likely never recoup the upfront cost. Keep the cash liquid or apply it to the down payment instead.

Are mortgage points tax-deductible?

Often yes. Discount points are generally deductible as prepaid mortgage interest in the year you pay them, provided you itemize and the loan is for your primary home meeting IRS rules. A down payment offers no equivalent deduction, though the tax break rarely changes the core points-versus-down-payment decision.