Mortgage points and buydowns: is it worth paying to lower your rate?
The short answer
One discount point costs 1% of your loan amount and typically lowers your rate by around 0.25 percentage point, though the exact amount varies by lender and market. Paying points makes sense if you keep the loan past the break-even point: the cost of the points divided by the monthly savings. On a $400,000 loan, one point costs $4,000 and a 0.25-point rate cut saves about $67 a month, about a five-year break-even.
The break-even math
Break-even months = cost of points / monthly payment savings.
Example: $400,000 30-year loan. At 7.03%, principal and interest is about $2,669. Paying one point ($4,000) to get 6.78% brings it to about $2,602, saving about $67 a month. $4,000 / $67 is about 60 months. If you expect to sell or refinance within five years, points probably do not pay off.
Permanent vs. temporary buydowns
- Permanent buydown (discount points): lowers your rate for the life of the loan.
- Temporary buydown (such as a 2-1): lowers your rate by 2 points in year one and 1 point in year two, then it returns to the note rate. The cost is prepaid into an account, often by the seller or builder. It helps early cash flow but does not change your long-term rate.
When a seller credit is better used on points
In a market with rising inventory, you may get seller concessions. Using that money to buy down the rate can lower your payment more than an equal price cut. For example, $10,000 off the price saves about $67 a month at 7%, while $10,000 of points on a $400,000 loan could lower the rate by around half a point or more, saving well over $100 a month. Ask your loan officer to price both.
What to compare
Look at section A of your Loan Estimate for points, and compare the APR, which blends rate and fees. Ask each lender for quotes with zero points and with one point so you can compare fairly.
Common questions
Are mortgage points tax deductible?
Points paid on a loan to buy your main home are often deductible if you itemize, subject to IRS rules. Points on a refinance are usually deducted over the life of the loan. Ask a tax professional.
What are negative points or lender credits?
The opposite of points: you accept a slightly higher rate and the lender gives you a credit toward closing costs.