Thinking about buying a home in Chicago and wondering if mortgage points can lower your payment enough to be worth it? You are not alone. Many buyers want a smaller monthly payment but are unsure if paying upfront for a lower rate is a smart move. In this guide, you will see how points work, how to run a quick breakeven test, and when points make sense for Chicago and Cook County buyers. Let’s dive in.
Mortgage points explained
Mortgage or discount points are prepaid interest you pay at closing to get a lower interest rate. One point usually costs 1% of your loan amount. For example, if your loan is $400,000, one point costs $4,000.
There is no universal exchange rate between points and rate. A common rule of thumb is that 1 point can lower a 30-year fixed rate by about 0.25%, but the true reduction varies by lender, your credit, the loan program, and current market conditions. In some markets it might be closer to 0.125%. In others it could be 0.375% to 0.50%.
You are trading more cash at closing for a smaller monthly payment. The key is to compare what you pay upfront against what you save each month.
Tip: You can also do the opposite. If you accept a slightly higher rate, lenders can offer credits that reduce your closing costs. That is helpful if your priority is minimizing cash at closing.
How points change your payment
The standard mortgage payment formula for principal and interest on a fixed loan is:
M = P × [r(1 + r)^n] ÷ [(1 + r)^n − 1]
- P = loan amount
- r = monthly interest rate (annual rate divided by 12)
- n = number of payments (360 for a 30-year loan)
You do not need to memorize this. Your lender will show the monthly payment for each rate option. To test if points are worth it, focus on three numbers:
- Cost of points: 1% of the loan amount per point
- Monthly savings: payment without points minus payment with points
- Breakeven: cost of points divided by monthly savings
Chicago examples with real numbers
The examples below use simple assumptions to keep the math clear. Your numbers will vary based on your loan size and the exact rate reduction your lender offers.
Assumptions for all examples:
- Loan type: 30-year fixed
- Rate without points: 6.50% annual
- Rate with 1 point: 6.25% annual
- Rate reduction: 0.25% for 1 point
- Term: 360 months
Example A - entry price tier
- Example purchase price: $250,000 with 10% down
- Approximate loan amount: $225,000
- Cost of 1 point: $2,250
- Estimated monthly payment at 6.50%: about $1,423
- Estimated monthly payment at 6.25%: about $1,383
- Monthly savings: about $40
- Breakeven: $2,250 divided by $40 = about 56 months, or 4.7 years
Example B - move-up price tier
- Example purchase price: $450,000 with 10% down
- Approximate loan amount: $405,000
- Cost of 1 point: $4,050
- Monthly savings with the same rate drop scales with loan size: about $72
- Breakeven: $4,050 divided by $72 = about 56 months, or 4.7 years
Example C - higher price tier
- Example loan amount: $600,000
- Cost of 1 point: $6,000
- Monthly savings with the same rate drop: about $100
- Breakeven: $6,000 divided by $100 = 60 months, or 5 years
What this means: In these examples, buying 1 point pays off after roughly 4.5 to 5 years. If you expect to keep the home longer than the breakeven period, the point can save you money over time. If you plan to sell or refinance sooner, buying points usually does not pay off.
Breakeven math in plain English
Use this quick approach to decide:
- Ask your lender how much 1 point lowers your rate today. This can vary widely.
- Get two monthly payments: one without points and one with points.
- Divide the point cost by the monthly savings to find your breakeven in months.
- If the lender offers only a 0.125% reduction per point, the breakeven often doubles.
- If the lender offers a 0.375% to 0.50% reduction per point, the breakeven usually shortens.
- On 15-year loans, the same rate drop creates bigger monthly savings, so points can break even faster.
When points make sense in Chicago
Ownership horizon first
Your expected time in the home is the single most important factor. If you plan to stay longer than the breakeven period, points are more likely to help. With a typical 0.25% reduction per point on a 30-year fixed, breakevens commonly range around 4 to 7 years, depending on the loan size and rates.
Cash and competing priorities
Paying points uses upfront cash you might need for other goals. Compare buying points against:
- Increasing your down payment to reduce or remove PMI
- Paying off higher interest debt
- Boosting your emergency reserves
- Funding repairs or improvements that improve comfort or resale value
If buying points stretches your cash too thin, it can add risk.
Loan program notes
- Conventional conforming loans: Points are widely available and pricing varies by lender. Check conforming loan limits because crossing into jumbo territory can change pricing.
- Jumbo loans: Each lender prices points differently. Compare offers to see how much rate reduction you get per point.
- FHA loans: You can buy points to lower the rate. Keep program rules in mind about seller concessions and allowable closing costs.
- VA loans: Borrowers can pay points, but VA has its own contribution rules. Confirm details with your lender.
- ARMs: If your rate is fixed only for a few years, run the breakeven against that fixed period or your expected time in the home.
Down payment and PMI
Points do not change PMI rules. For conventional loans, reaching 20% equity removes PMI and can lower your monthly payment more than a small rate reduction. If you are close to 20% down, putting extra cash toward the down payment may beat buying points. If you will still have PMI even after buying points, compare the net monthly impact.
Market context in Cook County
In a competitive seller market, many buyers choose to conserve cash and avoid points. In a more balanced or buyer-friendly market, you may have room to negotiate seller credits toward closing costs or points. Any seller contribution must follow lender and program limits, so confirm details early.
Practical details you should know
Taxes and IRS rules
Points paid on the purchase of a primary residence are often treated as mortgage interest for tax purposes if you itemize and meet IRS conditions. For refinances, points are usually amortized over the life of the loan rather than fully deducted in the first year. Tax rules are personal and can change, so consult a tax professional and refer to IRS mortgage interest guidance, including Publication 936.
APR and lender disclosures
Points raise your upfront finance charges and affect your APR. Lenders must show the APR and the effect of points in your loan disclosures. Use those disclosures to compare offers, not just the headline interest rate. The Consumer Financial Protection Bureau also provides clear explanations on mortgage shopping, APR, and points.
Seller concessions and limits
Sellers can sometimes pay part of your closing costs, including points, within program rules. Conventional, FHA, and VA loans each have limits on seller concessions. Lenders may also cap the number of discount points. Some lenders offer temporary buydowns that lower the rate for the first year or two as an alternative to permanent points.
Quick decision checklist
- Estimate how long you will keep the home.
- Get written lender quotes for several point options, including the exact rate reduction per point and the APR.
- Calculate your breakeven using your real loan amount and quoted payments.
- Compare alternatives: more down payment, paying down debt, or taking lender credits.
- Review tax impacts with a tax advisor.
- Confirm any seller credits or program caps with your lender and agent.
Next steps for Chicago buyers
If the numbers show you will stay beyond breakeven and the monthly savings matter to your budget, points can be a smart tool to lock in a lower cost of ownership. If you expect to move or refinance sooner, you are usually better off keeping your cash and exploring lender credits or a larger down payment.
Ready to run your numbers side by side and see what fits your plan in Chicago or the west suburbs? I can help you compare real options and structure a winning offer. Connect with Tatiana Hernandez for clear, mortgage-smart guidance. Hablo Español.
FAQs
What are mortgage points for a Chicago home purchase?
- Mortgage points are prepaid interest you pay at closing to lower your interest rate, typically costing 1% of your loan amount per point.
How do I calculate the breakeven on points?
- Divide the upfront point cost by your monthly payment savings to get breakeven months, then compare that to how long you plan to keep the loan.
Are points worth it if I plan to refinance soon?
- Usually no, because you likely will not reach breakeven before refinancing, which means you would not recover the upfront cost.
Do points remove PMI on a conventional loan?
- No, points do not change PMI rules; increasing your down payment to reach 20% equity is what removes PMI on most conventional loans.
Can a seller in Cook County pay my points?
- Sometimes yes, but seller contributions must fit within loan program limits, so check with your lender and agent before negotiating.
Are points tax deductible for a primary home?
- Often yes if you itemize and meet IRS rules for points, while refinance points are commonly deducted over the life of the loan; consult a tax professional.
