Mortgage Points and Buy-Downs Explained

Mortgage points let you pay upfront to reduce your interest rate. It’s essentially prepaying interest for a lower monthly payment. Whether it makes sense depends on math—specifically, how long you’ll keep the loan.

What Are Mortgage Points?

One point equals 1% of your loan amount, paid at closing.

• $300,000 loan: One point = $3,000
• $500,000 loan: One point = $5,000

In exchange for paying points, the lender reduces your interest rate. The typical reduction is about 0.25% per point, though this varies by lender and market conditions.

The Two Types of Points

Discount Points (What Most People Mean)

Discount points lower your interest rate. This is what we’ll focus on in this guide.

Example:

• Base rate: 7.00%
• With 1 point ($3,000): 6.75%
• With 2 points ($6,000): 6.50%

Origination Points (A Fee, Not a Rate Reduction)

Some lenders charge origination points as a fee for processing your loan. These don’t lower your rate—they’re just a cost.

Important: When comparing loans, distinguish between discount points (optional, lowers rate) and origination points (fee). A loan advertising a lower rate with 2 points built in isn’t really cheaper than a higher rate with no points.

The Break-Even Calculation

Points only make sense if you keep the loan long enough to recoup the upfront cost through monthly savings.

Example:

• Loan amount: $400,000
• Without points: 7.00%, monthly payment: $2,661
• With 1 point ($4,000): 6.75%, monthly payment: $2,594
• Monthly savings: $67
• Break-even: $4,000 ÷ $67 = 60 months (5 years)

If you keep the loan at least 5 years, buying the point saves money. If you sell or refinance sooner, you lose.

Calculating Your Break-Even

1. Calculate cost of points (loan amount × number of points × 1%)
2. Calculate monthly payment at each rate
3. Find monthly savings (payment without points − payment with points)
4. Divide cost by monthly savings = break-even in months

Use our Points Strategy Tool to run these calculations automatically.

Real Numbers: When Points Win

Scenario: $350,000 mortgage, 30-year term

Points	Cost	Rate	Payment	Monthly Savings	Break-Even
0	$0	7.00%	$2,329	—	—
1	$3,500	6.75%	$2,270	$59	59 months
2	$7,000	6.50%	$2,212	$117	60 months

If you keep this loan 10 years (120 months):

• No points: $0 upfront, $279,480 in payments
• 1 point: $3,500 upfront, $272,400 in payments = $3,580 savings
• 2 points: $7,000 upfront, $265,440 in payments = $7,040 savings

The more points, the more savings—if you stay long enough.

If you sell after 4 years (48 months):

• No points: $0 upfront, $111,792 in payments
• 1 point: $3,500 upfront, $108,960 in payments = $668 loss

When Buying Points Makes Sense

Good candidates for buying points:

1. You’re certain you’ll stay 7+ years. Longer time horizon = more savings from lower rate.

2. You have extra cash beyond your down payment. Don’t buy points if it depletes your emergency fund.

3. You’re at the top of your budget. Lower payments give you more monthly breathing room.

4. Rates are high and you won’t refinance soon. If rates are likely to drop significantly, you’ll refinance anyway and lose the point investment.

5. You’re in a high tax bracket (sometimes). Points are often tax-deductible in the year paid.

When to Skip Points

Skip points if:

1. You might move in 5 years or less. You probably won’t break even.

2. You might refinance. If rates drop 1%+, you’ll refinance and lose the points investment.

3. You need the cash. Points cost thousands. That money might be better used elsewhere.

4. You’re already getting a great rate. The lower the base rate, the less impact points have.

5. You can invest the money at higher returns. If you can earn more investing than you’d save in interest, skip points.

Temporary Buy-Downs: A Different Approach

Temporary buy-downs reduce your rate for the first few years, then it increases to the permanent rate.

2-1 Buy-Down

• Year 1: Rate is 2% below note rate
• Year 2: Rate is 1% below note rate
• Year 3+: Full note rate

Example with 7% note rate:

• Year 1: 5% (payment: $1,879)
• Year 2: 6% (payment: $2,098)
• Year 3+: 7% (payment: $2,329)

3-2-1 Buy-Down

• Year 1: 3% below
• Year 2: 2% below
• Year 3: 1% below
• Year 4+: Full rate

Who Pays for Temporary Buy-Downs?

Usually the seller. In a slower market, sellers may offer buy-down concessions to attract buyers. The cost is paid upfront at closing.

Why it works for sellers: A $10,000 buy-down concession may make their home affordable to more buyers without lowering the sale price.

When Temporary Buy-Downs Make Sense

1. Your income is rising. If you expect raises, the graduated payments match your income growth.

2. You plan to refinance. If rates drop, you’ll refinance before reaching the full rate anyway.

3. The seller is paying. Free money is free money.

4. You need to qualify. Lenders may qualify you at the lower initial rate (check program rules).

Points vs. Larger Down Payment

If you have extra cash, should you buy points or make a larger down payment?

Larger down payment advantages:

• Reduces loan amount (lower payments forever)
• May eliminate PMI (if you reach 20% equity)
• Builds instant equity
• Reduces total interest over loan life

Points advantages:

• More bang for the buck in rate reduction (per dollar spent)
• Potentially tax-deductible
• Preserves equity flexibility

General rule: If you’re close to 20% down, put the extra toward down payment to eliminate PMI. If you’re far from 20%, points may make more mathematical sense—but run the numbers for your specific situation.

Tax Implications

Mortgage points are generally tax-deductible, but rules vary:

Purchase loans: Points are usually fully deductible in the year you pay them.

Refinances: Points must be deducted over the life of the loan (amortized).

Requirements for deduction:

• Loan must be secured by your main home
• Points must be calculated as a percentage of loan amount
• Must be paid from your own funds (not rolled into loan)
• Amount must be typical for your area

Consult a tax professional for your specific situation.

Negotiating Points

Remember that points, like most closing costs, are negotiable.

Strategies:

1. Compare lenders: Different lenders offer different rate/point combinations.
2. Ask for rate match: If one lender offers better rate/point combo, ask others to match.
3. Request seller concessions: Ask the seller to pay for points as part of negotiations.
4. Consider lender credits: Some lenders offer a slightly higher rate in exchange for credits toward closing costs—the opposite of points.

The Bottom Line

Buying points is a math problem: Will you keep the loan long enough to break even?

If you’re confident you’ll stay 7+ years, rates are reasonable, and you have cash to spare, buying points can save thousands over the life of your loan.

If there’s any chance you’ll move or refinance within 5 years, skip the points and keep your cash.

When in doubt, do the break-even calculation. The math doesn’t lie—even when loan officers suggest otherwise.