Points vs. Lender Credits: The Break-Even Math Every MLO Must Know

Discount points and lender credits are opposite sides of the same trade-off: pay more at closing to get a lower rate, or accept a higher rate to receive cash toward closing costs. MLOs who can calculate the break-even quickly and present it clearly help borrowers make decisions that actually align with their financial plans.

How Discount Points Work

One discount point costs 1% of the loan amount and typically reduces the note rate by 0.125 to 0.25 percentage points, depending on the rate environment and investor pricing. The actual rate reduction per point varies by lender, market conditions, and loan type -- it is never a guaranteed fixed reduction. On a $400,000 loan, one point costs $4,000 and reduces the payment by the amount the rate reduction generates.

Break-Even Calculation

• ✦Break-even months = upfront point cost divided by monthly payment savings
• ✦Example: 1 point ($4,000) saves $60 per month -- break-even is 67 months (5.5 years)
• ✦If the borrower plans to sell or refinance before the break-even, paying points is a negative financial trade
• ✦For refinances, also factor in that the upfront cost may be financed into the new loan, which changes the true cost basis

How Lender Credits Work

Lender credits work in reverse: the borrower accepts a higher rate in exchange for a credit toward closing costs. A credit of 1% on a $400,000 loan provides $4,000 toward the closing costs, at the cost of a higher monthly payment. Credits cannot exceed total closing costs -- excess credits are not refunded to the borrower and cannot be applied to the down payment on a purchase.

When Each Makes Sense

Points make sense for borrowers who are confident they will hold the loan for many years -- a purchase borrower staying in their forever home, or a refinance dropping a rate by more than 1%. Lender credits make sense for borrowers who are cash-constrained at closing, expect to refinance again within a few years, or are purchasing a property they plan to sell within a defined timeframe. The decision is entirely driven by the break-even relative to the expected hold period.