Mortgage Discount Points vs. Investing the Cash: A 10-Year Cost Comparison
A buyer closing on a $400,000 mortgage this month will almost certainly be offered a menu of discount points to lower the rate — and the loan estimate will show exactly how much each point costs and how much it supposedly saves. What it won't show is the question that actually determines whether it's a good deal: what else that cash could be doing instead. Below is a side-by-side, numbers-first look at paying points to buy down a rate versus keeping the money and investing it, using current rates and a full 5-year and 10-year cost comparison.
Where mortgage rates and points stand right now
As of October 1, 2026, Freddie Mac's Primary Mortgage Market Survey put the national average 30-year fixed rate at 7.28% and the 15-year fixed at 6.60%, both no-point national averages (Freddie Mac PMMS, as of October 1, 2026). Freddie Mac notes that under current loan-level pricing requirements, lenders aren't required to report average fees and points, so there's no single "standard" buydown rate published anywhere — it's negotiated loan by loan.
The Consumer Financial Protection Bureau's plain-English definition is the cleanest starting point: "one point equals one percent of the loan amount," and the rate reduction you get for that one percent "depends on the specific lender, the kind of loan, and the overall mortgage market" (CFPB, "How should I use lender credits and points"). In the CFPB's own worked example, paying 0.375 points cut a 5.0% rate to 4.875% — a 0.125 percentage-point reduction. That's a useful reminder that the common lender rule of thumb — roughly 0.25 percentage points of rate reduction for each full point paid — is an industry convention, not a guarantee. Every actual rate sheet should be checked against that assumption before anyone writes a check.
The worked example: one $400,000 loan, two ways to use $8,000
To make the comparison concrete, assume a household is financing a home with a $400,000, 30-year fixed-rate purchase mortgage and has $8,000 in uncommitted cash available at closing. Two paths:
- Option A — Buy 2 discount points. Cost: $8,000 (2% of $400,000). Using the 0.25-point-per-point planning convention, the rate drops from the 7.28% PMMS average to 6.78%.
- Option B — Pay no points. Keep the $8,000, take the loan at 7.28%, and invest the $8,000 elsewhere (a brokerage account, an IRA, or extra retirement contributions).
Running standard 30-year amortization on $400,000:
- Option A monthly principal & interest at 6.78%: $2,602.37
- Option B monthly principal & interest at 7.28%: $2,736.85
- Monthly savings from buying points: $134.48
Property taxes, insurance, and HOA dues are left out deliberately — they're identical under both options and don't affect which one is cheaper. The simple, cash-flow-only breakeven that most lenders quote is $8,000 ÷ $134.48 ≈ 59.5 months (about 4 years, 11 months). That number alone is the one most buyers see on a loan estimate. It's not the whole picture, because it ignores both the fact that the $8,000 could have been earning something the whole time, and the fact that the lower rate also pays down principal slightly faster.
Five-year and ten-year side-by-side costs
The table below adds back both pieces: cumulative principal-and-interest actually paid, and the loan balance still owed at each checkpoint (since a lower rate retires slightly more principal for the same payment). All figures assume no prepayments, no refinance, and the loan held to each checkpoint.
| Metric (as of loan origination; $400,000, 30-yr fixed) | Option A: 2 points, 6.78% | Option B: 0 points, 7.28% |
|---|---|---|
| Upfront points cost | $8,000 | $0 |
| Monthly P&I | $2,602.37 | $2,736.85 |
| Total P&I paid through year 5 | $156,142.44 | $164,210.95 |
| Remaining balance at year 5 | $375,627.52 | $377,631.45 |
| Full 5-year cost (points + P&I paid + balance owed) | $539,769.96 | $541,842.40 |
| Total P&I paid through year 10 | $312,284.89 | $328,421.90 |
| Remaining balance at year 10 | $341,452.30 | $345,476.83 |
| Full 10-year cost (points + P&I paid + balance owed) | $661,737.19 | $673,898.73 |
Assumptions: $400,000 loan amount, 30-year fixed term, rates of 6.78% (Option A) vs. 7.28% (Option B, the Freddie Mac PMMS national average as of October 1, 2026), standard monthly amortization, no extra payments, no PMI, taxes/insurance excluded from both sides equally. "Full cost" is a net figure: cash spent (points plus payments made) plus the debt still owed, so it treats a dollar of equity the same as a dollar not yet spent.
On the mortgage math alone — before anyone touches the $8,000 — Option A is already ahead at both checkpoints: about $2,072 cheaper at year 5 and about $12,162 cheaper at year 10. That's the case against investing the difference. The next section is the case for it.
The investing alternative: what the same $8,000 could earn
In Option B, the $8,000 never left the household's hands — it's sitting in an account, earning whatever that account earns. The question is how big a return it needs to produce to close that $2,072 / $12,162 gap. The table below runs the same two checkpoints against a range of annual investment returns, compounded annually on the lump sum.
| Assumed annual return on the $8,000 | Value at year 5 | Option B net advantage over A at year 5 | Value at year 10 | Option B net advantage over A at year 10 |
|---|---|---|---|---|
| 0% (cash, no growth) | $8,000 | +$5,928 | $8,000 | −$4,162 |
| 4% | $9,733 | +$7,661 | $11,842 | −$320 |
| 6% | $10,706 | +$8,633 | $14,327 | +$2,165 |
| 7% | $11,220 | +$9,148 | $15,737 | +$3,576 |
| 8% | $11,755 | +$9,682 | $17,271 | +$5,110 |
| 10% | $12,884 | +$10,812 | $20,750 | +$8,588 |
A positive number means Option B (no points, invest instead) ends up with a lower net cost / stronger net position than Option A by that amount; a negative number means Option A (buy points) is still ahead. Investment growth is illustrative only — it is not tied to any specific account or product and is not guaranteed. For context, the S&P 500's compound annual return from 1928 through 2025 has averaged roughly 9.92% nominal (about 6.64% after inflation), per a historical-returns compilation last updated September 20, 2026 (The Motley Fool, S&P 500 Annual Returns); this is cited for context only, not as a guaranteed or recommended assumption, and past performance does not predict future results.
Two things fall out of this table. First, at the 5-year mark, keeping the cash beats buying points at every return level tested, including 0% — simply because five years isn't quite enough time for the rate savings to overtake the up-front hit, once the retained $8,000 is counted as an asset rather than being ignored. Second, at 10 years the result flips and becomes genuinely sensitive to the return assumption: below roughly a 4%–4.5% annual return, buying points wins; above that, investing wins, and the gap widens every year the loan is held beyond that. Re-running the 0%-return case year by year shows the crossover between the two options lands around year 7 to year 8 of the loan.
The tax deduction wrinkle — and why it's often smaller than assumed
Points on a purchase loan for a primary residence can often be fully deducted in the year they're paid, not spread over the life of the loan — but only if all nine of the IRS's conditions are met, including that the loan is secured by the main home, points are an established local practice, the amount isn't disguised closing costs, and enough cash was brought to closing to cover the points (IRS Publication 936). Two practical limits matter more than the mechanics, though. First, the deduction only has value if the household itemizes rather than taking the standard deduction, which for tax year 2026 is $16,100 for single filers and $32,200 for married couples filing jointly (IRS, 2026 inflation adjustments) — a bar that mortgage interest plus points alone often doesn't clear in the first year unless other itemized deductions are also substantial. Second, even for a household that does itemize, the benefit is only the marginal tax rate times the points paid — for illustration, in a 22% federal bracket, $8,000 of points would shave roughly $1,760 off that year's federal tax bill, not the full $8,000. That's a real but secondary factor, not something to lean on as the deciding reason to buy points.
Which option actually wins — and when it doesn't
If someone were deciding today, the stronger default case leans toward not paying points and keeping the cash, for a specific reason: the 10-year breakeven against even a conservative invested return (roughly 4%) is close enough to call, while the 5-year outcome favors keeping the cash outright regardless of what it earns. Most buyers also underestimate how often a 30-year loan is actually refinanced, sold, or paid off well before year 10 — a move, a rate-driven refinance, or a job change are all common inside that window — and every one of those events pushes the comparison further toward the "don't buy points" side, since the points cost is sunk the moment the loan is no longer in force. The case for buying points strengthens specifically for a buyer who is confident they'll hold this exact loan 10+ years, who has no better use for the cash, and who values a guaranteed, contractual reduction in payment over an uncertain market return.
That last clause is the real trade-off, and it cuts both ways. Buying points converts cash into a certain, contractual savings — the lower payment shows up whether the stock market is up 20% or down 20% that year. Investing the $8,000 instead means accepting market risk, including the real possibility of a down year right when the money might be needed. For a buyer with thin cash reserves, a less stable job, or a low tolerance for market swings, the guaranteed outcome of points can be worth paying for even when the expected-value math favors investing. Conversely, a lower monthly payment from points can also help a marginal buyer meet a lender's debt-to-income requirement to qualify for the loan in the first place — a benefit the dollar comparison above doesn't capture at all. And if a seller or builder is offering to pay points as a concession, that changes the decision entirely, because it's no longer the buyer's $8,000 being spent — in that case, taking the free buydown is almost always worth it.
Tip: Break-even math like this is worth running on your own numbers before you sign anything. A desktop financial calculator handles the amortization side, and a budget planner helps you see whether the upfront cash is better spent on closing costs or kept as reserves. (These are Amazon Associate links — we may earn a small commission on qualifying purchases.)
A step-by-step checklist before paying for points
- Get the lender's actual points-for-rate pricing in writing for this specific loan — don't rely on the 0.25-point-per-point rule of thumb used above, since CFPB's own example shows it can run noticeably lower.
- Calculate the simple cash-flow breakeven: points cost ÷ monthly payment savings.
- Be honest about how long this loan will likely stay in place — job stability, planned moves, and the odds of refinancing if rates fall all shorten the effective holding period.
- Decide, specifically, where the cash would go if not spent on points (retirement account, brokerage account, emergency fund, higher-rate debt payoff) and what realistic return or benefit it would produce there.
- Check whether itemizing deductions is even in play for the tax year in question, against the current standard deduction, before counting on a tax benefit from points.
- Confirm that paying points won't draw down cash reserves below a comfortable emergency-fund level.
- If a seller, builder, or lender credit is covering some or all of the points, re-run the decision — it is a different question once the cash isn't coming out of the buyer's own pocket.
This article is for general informational purposes only and does not constitute personalized financial, tax, or legal advice. Mortgage rates, point pricing, and tax rules referenced above are current as of the dates cited and will change over time; actual loan pricing, rate-reduction-per-point, and tax outcomes vary by lender, loan program, and individual circumstances. No specific investment return is guaranteed. Consult a licensed mortgage professional, CPA, or financial advisor about your own situation before making a decision.
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