Mortgage points and rate buydowns: when paying for a lower rate pays off

Points are prepaid interest. Whether they are a bargain or a waste depends on one number: how long you keep the loan.

Discount points

One point equals 1% of the loan amount, paid at closing, in exchange for a lower permanent rate — commonly about 0.25 percentage points per point, though the ratio varies by lender and market. On a $350,000 loan, one point costs $3,500 and might cut the rate from 6.75% to 6.5%, lowering the payment by about $58 a month.

The break-even

Divide the cost of the points by the monthly saving: $3,500 ÷ $58 ≈ 60 months. If you keep the loan longer than five years, the points pay off; if you sell or refinance sooner, you lose money. Most Americans keep a mortgage seven to ten years but refinance more often when rates fall — be honest about your own odds. Points are generally tax-deductible in the year paid on a purchase (spread over the loan term on a refinance); see IRS Publication 936.

Negative points (lender credits)

The reverse trade: accept a higher rate and the lender pays some of your closing costs. This is the right move if you expect to refinance or sell within a few years, or if cash at closing is your binding constraint. The break-even logic is identical, in reverse.

Temporary buydowns: 2-1 and 3-2-1

A 2-1 buydown lowers your rate by 2 points in year one and 1 point in year two, then reverts to the note rate. The cost — the interest difference for those two years — is deposited in an escrow account at closing, almost always paid by the seller or builder as a concession. Temporary buydowns lower early payments without changing the loan itself; you must qualify at the full note rate. They are useful when a seller would rather fund a buydown than cut the price, but they are not a substitute for affordability at the permanent rate.

Comparing offers

Points are why two lenders’ “rates” are not comparable. Compare Loan Estimates at the same rate (ask each lender to price the same rate and show the points or credits), or at zero points. The APR on page 3 folds points in, but only over the full term, which overstates their cost if you will not keep the loan that long.

Frequently asked questions

Are origination points the same as discount points?

No. Origination points are lender fees for making the loan and buy nothing. Discount points buy a lower rate. Both appear in Section A of the Loan Estimate; only discount points are worth comparing on a break-even basis.

Can the seller pay my points?

Yes, within concession limits (3% to 9% of price on conventional loans depending on down payment, 6% on FHA, 4% plus costs on VA). Seller-paid points are a common way to use concessions when closing costs are already covered.

Should I pay points if I expect rates to fall?

No. If you expect to refinance within a few years, points are money spent on a rate you will abandon. Take lender credits instead and keep the cash.