Mortgage Points and Rate Buydowns: Worth It or Not?
Mortgage points let you pay upfront to get a lower interest rate. Sounds great — but the math does not always work in your favor. Here is how to evaluate it.
What Points Are
One discount point equals 1% of your loan amount, paid at closing. Each point typically reduces your rate by 0.25% (though this varies by lender and market conditions). On a $300,000 loan, one point costs $3,000 and might lower your rate from 7% to 6.75%, saving about $50/month on your payment.
The Break-Even Calculation
Divide the cost of the points by your monthly savings. Using the example above: $3,000 / $50 = 60 months, or 5 years. If you keep the loan longer than 5 years, you save money. If you sell or refinance before 5 years, you lost money. This simple calculation should drive your decision.
Temporary Buydowns
A 2-1 buydown is different from permanent points. The rate is reduced by 2% in year one and 1% in year two, then goes to the full rate in year three. The cost is typically paid by the seller or builder as a concession. This helps with early affordability but does not change your long-term payment. Make sure you can afford the full payment in year three before accepting a temporary buydown.
Key Takeaways
- ✓One mortgage point costs 1% of the loan amount and reduces the rate by about 0.25%
- ✓Calculate the break-even period — only buy points if you will 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
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