Mortgage Points and Rate Buydowns: Worth It or Not?

Mortgage points let you pay upfront for a lower interest rate. That sounds great, but the math does not always work in your favor. Here is how to evaluate it.

One discount point equals 1% of your loan amount, paid at closing. How much a point lowers your rate varies by lender and market, so compare options on each Loan Estimate. An illustrative example, not a rate quote: on a $300,000, 30-year fixed loan, one point costs $3,000. If it lowered the rate from 7% to 6.75%, principal and interest would drop from about $1,996 to about $1,946 a month, a savings of about $50. The reverse, a lender credit, lowers closing costs in exchange for a higher rate.

Divide the cost of the points by your monthly savings. In the example above, $3,000 / $50 = 60 months, or 5 years. If you keep the loan longer, the points pay for themselves. If you sell or refinance sooner, they cost more than they saved. Also weigh what else that cash could do, such as a larger down payment or your emergency fund.

A 2-1 buydown is different from permanent points. The rate is reduced by 2 percentage points in year one and 1 in year two, then goes to the full note rate in year three. The cost is often paid by the seller or builder as a concession, which counts toward the loan's seller-contribution limit. It helps early affordability but does not change your long-term rate, and lenders generally evaluate you at the full rate. Make sure you can afford the year-three payment before accepting one.

• ✓One mortgage point costs 1% of the loan amount; how much it lowers the rate varies by lender
• ✓Calculate the break-even period — points only pay off if you keep the loan that long
• ✓Temporary buydowns lower early payments but do not change your long-term rate
• ✓Always compare paying points vs. making a larger down payment instead