Mortgage Points and Buydowns
Mortgage Points and Buydowns
A mortgage point costs 1% of the loan amount and typically lowers your rate by 0.25%. Paying upfront for a lower rate makes sense only if you'll stay in the home long enough to recover the cost. Most borrowers skip points.
Key takeaways
- One discount point = 1% of loan amount. On a $280,000 loan, one point costs $2,800.
- Each point typically lowers your interest rate by 0.25%, occasionally 0.375%.
- Buying points makes sense if you'll stay long enough to break even on the upfront cost (typically 5–10 years).
- Buydowns (3/2/1, 2/1) are temporary rate reductions, common in seller-financed deals or builder incentives; they're rarely worth the cost.
- Always compare: upfront point cost vs. monthly savings vs. break-even holding period.
How discount points work
When you take out a mortgage, the lender quotes a rate—say 6.0%. This is the "par" rate (no points, no discount). If you want a lower rate, you can "buy it down" by paying points upfront.
Point pricing example (typical 2024 market):
- $280,000 loan
- Par rate (no points): 6.0%, monthly P&I = $1,679
- 1 point ($2,800 cost): 5.75%, monthly P&I = $1,636
- 2 points ($5,600 cost): 5.5%, monthly P&I = $1,592
Each point costs 1% of the loan and usually saves 0.25% on the rate. Some lenders are more generous (0.375% per point); others less so (0.125% per point). Shopping multiple lenders reveals the true market rate-to-point conversion.
Origination fees vs. discount points
Don't confuse them:
Origination fee: Lender's fee for processing the loan, typically 0.25–1% of the loan amount. This is mandatory and unavoidable (though you can shop lenders to minimize it).
Discount points: Optional charges to buy down the rate. You can pay 0 points, 1 point, 2 points, etc. Some borrowers pay 3+ points for very low rates.
On a $280,000 loan:
- Origination fee (0.5%): $1,400 (mandatory)
- 0 discount points: $0
- Total closing costs from these two: $1,400
Alternatively:
- Origination fee (0.5%): $1,400
- 2 discount points: $5,600
- Total from these two: $7,000
The second option costs $5,600 more upfront but secures a lower rate.
Break-even calculation: Do points pay off?
Example: $280,000 loan, 30-year fixed
Option A: 6.0% (no points)
- Monthly P&I: $1,679
Option B: 5.5% (2 points costing $5,600)
- Monthly P&I: $1,592
- Monthly savings: $87
Break-even holding period: $5,600 ÷ $87/month = 64.4 months ≈ 5.4 years
If you plan to keep the home 7 years, points pay off ($87 × 84 months = $7,308 savings vs. $5,600 cost = $1,708 net gain).
If you plan to keep it 4 years, points don't pay off ($87 × 48 months = $4,176 savings < $5,600 cost = $1,424 loss).
When to buy points
Buy points if:
- You're confident you'll stay 7+ years (break-even is usually 5–8 years; 7+ gives a comfortable margin).
- Interest rates are historically low, and you want to "lock in" the rate (prevent future increases).
- You have enough cash to cover points without touching emergency reserves.
- You have stable income and low likelihood of job loss (which might force a move).
Example scenario: You're 35, just got a promotion with locked-in tenure, planning to stay in the home until 55+. Buying 2 points at $5,600 cost breaks even in 5.4 years. With 20+ years ahead, points make financial sense.
When to skip points
Skip points if:
- You plan to stay fewer than 5 years (break-even is too far away).
- You might relocate for work (risk of having to sell early).
- Your income is variable or uncertain (freelance, startup, commission-based).
- You're using most of your savings for the down payment and have limited emergency reserves.
- You'd rather have the $5,600 in accessible savings for home repairs or other emergencies.
Example scenario: You're 28, got a job offer with a 3-year contract, plan to stay in the home until the contract ends, then potentially relocate. Skip points. The 5-year break-even doesn't align with your 3-year horizon.
Buydowns: Temporary rate reductions (often poor value)
A buydown temporarily reduces the mortgage rate for 1–3 years, then resets to the note rate.
Common structures:
- 3/2/1 buydown: Year 1 at rate − 3%, year 2 at rate − 2%, year 3 at rate − 1%, then full rate
- 2/1 buydown: Year 1 at rate − 2%, year 2 at rate − 1%, then full rate
- 1/1 buydown: Year 1 at rate − 1%, then full rate
Example: 6.0% note rate, 2/1 buydown
- Year 1: 4.0% (−2%)
- Year 2: 5.0% (−1%)
- Years 3–30: 6.0% (note rate)
Cost: Typically 1–3 points paid upfront by the buyer or seller.
The problem: You enjoy a lower payment for 1–2 years, then it jumps. On a $280,000 loan at 6% note rate with a 2/1 buydown costing 2 points ($5,600):
- Year 1: $1,339/month (at 4.0%) vs. $1,679 (6.0%) = $340 savings
- Year 2: $1,510/month (at 5.0%) vs. $1,679 (6.0%) = $169 savings
- Years 3–30: $1,679/month (at 6.0%), no savings
Total savings in years 1–2: ($340 × 12) + ($169 × 12) = $6,228
Break-even: You save $6,228 but paid $5,600. Net gain: $628 over 2 years.
Year 3 onward: Payment jumps $339/month (from year 1 to year 3). This payment shock is unpleasant and catches some borrowers by surprise.
When buydowns make sense:
- Builder or seller is paying for it (not you). Some builders offer 2/1 buydowns as incentives. If the cost isn't coming from your pocket, take it (you get temporary savings for free).
- You expect income to grow significantly (20%+ increase in years 2–3), so the year 3 payment jump is manageable.
When buydowns don't make sense:
- You're paying for it out of pocket. The break-even is tight, and the payment jump is jarring.
- You're already stretching your budget; the year 3 payment increase could be unaffordable.
Worked example: Points vs. no points over different hold periods
Loan: $280,000. Par rate: 6.0%, monthly P&I = $1,679.
Scenario 1: Hold 3 years, then sell
Option A: No points, 6.0%
- Monthly payment: $1,679
- 36-month cost: $1,679 × 36 = $60,444
Option B: 2 points ($5,600), 5.5%
- Monthly payment: $1,592
- 36-month cost: ($1,592 × 36) + $5,600 = $62,912
- Points don't break even (cost: $62,912 vs. no points: $60,444; difference: +$2,468)
Verdict: Skip points if holding 3 years.
Scenario 2: Hold 7 years, then sell
Option A: No points, 6.0%
- Monthly payment: $1,679
- 84-month cost: $1,679 × 84 = $140,836
Option B: 2 points ($5,600), 5.5%
- Monthly payment: $1,592
- 84-month cost: ($1,592 × 84) + $5,600 = $139,408
- Points break even (savings: $1,428)
Verdict: Buy points if holding 7 years.
Scenario 3: Hold 15 years, then sell
Option A: No points, 6.0%
- Monthly payment: $1,679
- 180-month cost: $1,679 × 180 = $302,220
Option B: 2 points ($5,600), 5.5%
- Monthly payment: $1,592
- 180-month cost: ($1,592 × 180) + $5,600 = $291,760
- Points save $10,460
Verdict: Buy points. Significant savings over 15 years.
The refinance complication
If you buy points and then refinance 5 years later, you've incurred the point cost but didn't hold long enough to break even. This is a real risk in a rate-drop scenario.
Example: You buy 2 points ($5,600) to get 5.5% in 2024. In 2027, rates drop to 4.5%, and you refinance. You don't get the points back; they're sunk. If you'd skipped points and just paid 6.0%, you'd have less savings during years 2024–2027 but wouldn't have the sunk point cost.
Strategy: Only buy points if you're very confident you won't refinance, OR if you're disciplined enough to refuse a refi temptation.
Decision tree
Next
You've mastered rates, terms, and points. Now comes an obstacle many first-time buyers face: PMI (private mortgage insurance). If you're putting down less than 20%, lenders require PMI—but understanding when you can drop it is crucial.