Wondering if buying mortgage points is worth it for your Austin home purchase? You are not alone. With rates shifting and closing costs adding up, it is smart to understand how points work before you commit cash at the closing table. In this guide, you will learn what points are, how they affect your payment, how to run a simple break-even, and the Austin-specific factors that help you decide with confidence. Let’s dive in.
Mortgage points, explained
Discount points are an upfront fee you pay the lender at closing to reduce your interest rate. One point equals 1 percent of your loan amount. The rate reduction per point is set by each lender and the market, so it varies.
Do not confuse discount points with origination points. Origination points are lender fees for processing the loan. They do not lower your rate. Your points and fees should be clearly labeled on your federal disclosures, including the Loan Estimate and the Closing Disclosure.
Lenders also disclose APR, which spreads upfront costs like points over the full term of the loan. APR can help you compare offers, but it assumes you keep the loan to maturity. If you plan to move or refinance earlier, a simple break-even test is more practical.
How points change your payment
Buying points lowers your interest rate, which reduces your monthly principal and interest payment. The exact savings depend on your lender’s pricing and your loan program. A common rule of thumb is roughly 0.125 to 0.25 percentage point rate reduction per point on conventional loans, but always confirm with real quotes.
Simple Austin example
Here is a plain example using a 30-year fixed loan of $450,000.
- Option A, zero points, 6.50 percent: monthly principal and interest is about $2,841.
- Option B, buy 1 point for $4,500, 6.25 percent: monthly principal and interest is about $2,771.
- Monthly savings: about $70.
Break-even months = cost of points divided by monthly savings. In this example, $4,500 divided by $70 is about 64.5 months, or roughly 5.4 years.
Break-even and taxes
If points are deductible for a primary home under federal rules, your effective after-tax cost is lower. For example, at a 24 percent federal tax bracket, a $4,500 point could have an effective cost near $3,420. That would shorten the break-even to about 49 months. See the IRS’ guidance in Publication 936 on mortgage interest and points, and always confirm your specific situation with a tax professional. Texas has no state income tax, so the federal rules typically drive the analysis here.
When points make sense in Austin
Think about how long you expect to keep the loan and what else you could do with your cash. Use these planning buckets as a starting point:
- Short hold, under 3 years. Buying points rarely pays off unless the cost is very low or the rate drop is unusually large.
- Medium hold, 3 to 7 years. Points can work if the break-even falls inside your expected timeframe and you are not draining emergency savings.
- Long hold, over 7 years. Points are more likely to pay off, especially if you want permanently lower monthly payments.
Also consider overall Austin housing costs. Travis County property taxes and HOA dues can be significant. Ask whether the monthly savings from points will meaningfully improve your total housing payment, not just principal and interest.
Market factors to weigh
Austin’s market can move quickly. If you believe rates will fall and you plan to refinance soon, paying points today is less attractive. If you want certainty in a rising-rate environment, points can help you lock a lower payment now. For investors or buyers planning renovations and a quick sale, paying points typically does not pencil out before the break-even.
Compare lender offers the right way
Request at least two or three competing quotes, each with several rate-and-point options. Use federal disclosures to compare apples to apples.
- Review the Loan Estimate for each option: zero points, one point, and multiple points if offered.
- Confirm which points are discount points that lower the rate versus origination fees.
- Note the monthly principal and interest with and without points.
- Compare APR, but rely on your break-even and expected hold period for the final call.
- Check total closing costs, any seller credits, and rate-lock terms.
Questions to ask your lender
- How much does one discount point cost on my loan, and how much does it reduce my rate?
- Please provide Loan Estimates for zero points, one point, and two points so I can compare.
- Are the points shown as discount points or origination fees on the Loan Estimate?
- What are my monthly principal and interest and APR for each option?
- Can I use seller-paid credits to buy down the rate, and what are the program limits?
Seller-paid points and programs
In many Austin purchases, you can negotiate seller concessions that the lender applies toward discount points. This can lower your rate with little or no extra cash from you. Limits for seller-paid credits vary by program, such as FHA, VA, USDA, or conventional loans. Ask your lender to confirm program rules and how credits would appear on the Loan Estimate and Closing Disclosure.
Step-by-step: Find your break-even
Use this quick process to decide if points fit your plan:
- Get written quotes. Ask for a Loan Estimate with zero points, one point, and two points.
- Calculate cost. Cost of points equals loan amount times the points percent. Example: 1 percent of $450,000 equals $4,500.
- Find monthly savings. Subtract the monthly principal and interest with points from the monthly principal and interest without points.
- Compute break-even. Break-even months equals cost of points divided by monthly savings.
- Adjust for taxes if applicable. If your points are deductible, multiply the cost by 1 minus your marginal federal tax rate, then divide by monthly savings again.
- Compare to your timeline. If you expect to keep the loan longer than the break-even, points may make sense.
Austin budgeting tips
- Keep emergency savings intact. Do not spend your last reserves on points.
- Consider opportunity cost. If you could invest that cash elsewhere, what return would you need to beat the mortgage savings?
- Look at total payment, not just principal and interest. Include property taxes, homeowner’s insurance, and any HOA dues in your monthly plan.
- Review rate locks. Make sure your lock window covers your closing timeline so your pricing does not change unexpectedly.
Your next step
If you want a lower mortgage payment and plan to stay in your Austin-area home long enough to reach break-even, buying points can be a smart move. If you expect to move or refinance sooner, keeping the cash in your pocket often wins. The key is getting clear quotes, running the numbers, and aligning the decision with your goals.
Ready to compare options line by line or negotiate seller credits toward your rate buy-down? Connect with Marion Lamantia for local guidance and a calm, numbers-first strategy tailored to your Austin purchase.
FAQs
What are mortgage discount points for Austin buyers?
- Discount points are upfront fees equal to a percentage of your loan that lower your interest rate and monthly principal and interest.
How do I calculate break-even on points?
- Divide the cost of points by the monthly principal and interest savings to get the number of months to recoup your upfront cost.
Are points tax deductible in Texas?
- Texas has no state income tax, but points on a primary home may be deductible at the federal level if IRS rules are met, so review Publication 936 and consult a tax pro.
Should I use APR to compare points offers?
- APR is useful for comparisons but assumes you keep the loan to maturity, so also run a break-even based on how long you expect to keep the loan.
Can sellers pay points in Travis County purchases?
- Yes, seller concessions can be applied to discount points subject to loan program limits and lender approval, so have your lender outline the options on your Loan Estimate.
