Mortgage Points Explained: Should You Buy Down Your Rate?

What Are Mortgage Points?

Mortgage discount points are an upfront fee paid at closing in exchange for a lower interest rate on your loan. One point equals 1% of the loan amount. On a $400,000 loan, one point costs $4,000.

Each point typically reduces the rate by 0.125 to 0.25 percentage points, though the exact reduction varies by lender, program, and market conditions. Points are sometimes called discount points to distinguish them from origination points (a lender fee that does not reduce the rate).

How the Break-Even Calculation Works

The break-even point is the number of months it takes for the monthly savings from a lower rate to recover the upfront cost of the points. The formula is simple: points paid divided by monthly payment savings.

Worked example: 1 point on a $400,000 loan costs $4,000. The rate drops from 7.0% to 6.75%. The monthly principal-and-interest payment drops from $2,661 to $2,594, a savings of $67 per month. Break-even is $4,000 ÷ $67 = 60 months, or 5 years.

If you stay in the home more than 5 years, the points save money. If you move or refinance before 5 years, you lose money on the trade.

When Paying Points Makes Sense

Paying points makes sense when you plan to keep the loan well past the break-even point. Borrowers buying a long-term primary residence, retiring in place, or locking in a low fixed rate in a high-rate environment all benefit from the math.

It also helps when you have extra cash at closing that would otherwise sit in a low-yield account. A 60-month break-even is effectively a guaranteed return on that capital for the remaining life of the loan.

When Paying Points Does Not Make Sense

Skip points if you might sell or refinance within the break-even window. Short-term buyers, borrowers expecting a job relocation, and anyone planning to refinance when rates drop will lose money on the trade.

Also skip points if the cash would be better used for the down payment, closing costs, or post-close reserves. A larger down payment can sometimes drop your loan-to-value below 80% and eliminate PMI, which often beats the savings from a point.

Lender Credits: The Opposite of Points

A lender credit (sometimes called a negative point) is the inverse of a discount point. The lender pays a portion of your closing costs in exchange for a higher interest rate. The math is the same, run in reverse: you save cash today and pay more per month over the life of the loan.

Lender credits work well for short-term borrowers, borrowers tight on cash at closing, and refinances where the goal is a no-cost transaction. They work poorly for long-term homeowners who would have recovered the closing cost savings in lower payments anyway.

Seller-Paid Buydowns: How They Work

In a buyer's market, sellers often agree to pay discount points on behalf of the buyer as a concession. The cost shows up on the seller's side of the Closing Disclosure, but the rate reduction belongs to the buyer for the life of the loan.

Seller-paid buydowns are negotiated inside the purchase contract. Maximum allowed concessions vary by loan program: conventional caps depend on down payment, FHA allows up to 6%, and VA allows up to 4% in seller concessions plus unlimited closing cost contributions.

Temporary Buydowns (2-1 Buydown) Explained

A 2-1 buydown is a temporary rate reduction. The interest rate is reduced 2 percentage points below the note rate in year 1 and 1 percentage point below in year 2, then reverts to the full note rate in year 3 and stays there for the remaining loan term.

Temporary buydowns are often paid by the seller as a concession in a slower market. They help buyers manage payments in the early years while expecting income to grow. The cost is calculated based on the total payment savings over the buydown period and is deposited into an escrow account at closing.