Points or lender credits: which one pays off?

Points and lender credits explained

A point is a fee you pay at closing. You pay points to lower your interest rate. One point is 1% of the loan amount.

A lender credit works the other way. You accept a higher interest rate. The lender pays part of your closing costs in return.

Both choices change your monthly payment. Both choices also change how much cash you need at closing. Neither choice is free. Many lenders offer both choices. You pick one, not both. Think of the decision as a trade. Points trade cash now for a lower payment later. Credits trade a higher payment later for cash now. The right trade depends on how long you keep the loan.

The example: one lender, two options

This example uses one lender and two offers. The same loan and the same lender make the comparison fair. Compare both offers before you decide.

Option A, with points:

Upfront cost: $11,000
New monthly payment: $2,463
True break-even month: 34
Cost after 7 years: $178,015

Option B, with credits:

Upfront cost: $1,000
New monthly payment: $2,628
True break-even month: 9
Cost after 7 years: $185,603

Read the upfront cost first. It shows the closing costs that the calculator counts, including points and minus credits. Then read the monthly payment. It shows what you pay each month. The true break-even month and the cost after 7 years show whether an option pays off over time.

The true break-even month is the month when an option starts to cost less than keeping your current loan. Option A reaches it at month 34. Option B reaches it at month 9.

After 7 years, Option A (points) costs less than Option B.

The rule: points pay off only if you keep the loan

Points cost cash now. The lower payment earns that cash back over time. Each month, the savings build up. You need enough months for the savings to equal the points you paid. Until then, the points have not paid for themselves.

In the example, Option A costs more than your current loan until month 34. If you sell the home or refinance before then, Option A costs you more than keeping your loan. Option B gets there at month 9, because its upfront cost is much lower.

A credit works in reverse. You save cash at closing, but each month costs a little more. That extra cost adds up. Over a long time, the extra cost can be larger than the cash you saved.

If you can sell or refinance again soon, credits often win. If you plan to keep the loan for many years, points often win. Your plans decide the choice, not the rate alone. Both options have a cost. The question is which cost fits your plans. Think about your job, your family plans, and whether you may move. Pick a time that matches those plans. Then test both offers against that time.

How to compare the options in the calculator

Follow these steps to compare the two offers.

Add Option A as an offer in the calculator. Enter its details.
Add Option B as a second, separate offer.
Set “How long will you keep this loan?” to the number of years you expect.
Compare the results for both offers. Check the break-even month and the cost at your planned time.

Change the number of years to see how the result changes. A short plan and a long plan can give different winners. Use the same steps for any lender that offers you two choices.

Want to see your own numbers? Open the calculator. Your numbers stay in your browser.