Are Mortgage Points Worth It? Buydowns Explained
The short version
When rates are high, buyers often look for ways to “buy down” their mortgage rate. There are two very different tools with similar names:
- Discount points (a permanent buydown): you pay more at closing, and your rate is lower for the life of the loan.
- A temporary buydown (such as a 2-1 buydown): someone pays upfront to lower your payment for the first year or few, then your rate rises to its full level.
Points pay off only if you keep the loan long enough. A temporary buydown helps with your first few payments but doesn’t change your long-term cost of borrowing. Either can be a good deal, especially when the seller or builder pays for it, but the math depends on how long you’ll keep the loan.
How discount points work
According to the Consumer Financial Protection Bureau (CFPB), one point equals 1% of your loan amount. On a $400,000 loan, one point costs $4,000. Points don’t have to be round numbers, and they’re paid at closing as part of your closing costs.
In exchange, the lender gives you a lower interest rate than you’d get with zero points on the same loan. How much lower varies: the CFPB notes that the reduction per point depends on the lender, the type of loan, and market conditions. Always ask the lender exactly what rate each option gets you, and whether that rate is locked (see how a mortgage rate lock works).
You’ll find points listed on page 2, Section A, of your Loan Estimate and Closing Disclosure. By law, points listed there must be connected to a discounted interest rate.
Lender credits are points in reverse. You accept a higher rate, and the lender pays some of your closing costs. You pay less upfront and more over time.
When points pay off: the break-even math
Here’s an example. The rates are illustrations, not current market rates, and the rate reduction per point is an assumption; your lender’s actual offer will differ.
You’re borrowing $400,000 on a 30-year fixed loan:
- With zero points at 7.00%: principal and interest of about $2,661 a month.
- With one point ($4,000) at 6.75%: about $2,594 a month.
You save about $67 a month. Divide the $4,000 cost by $67, and it takes about 60 months, or five years, to earn the cost back.
That leads to the most important question about points: how long will you keep this loan? Not how long you’ll live in the house, but how long you’ll keep this specific mortgage. If you sell or refinance before the break-even point, you lose money on points. In the example, refinancing after three years would mean you’d saved about $2,400 in payments on a $4,000 cost.
That matters more when rates are high, because high rates are exactly when people hope to refinance later. If you’re counting on refinancing in a couple of years, paying points works against you.
The CFPB suggests asking your loan officer to show you options with and without points, and to calculate the total cost over three timeframes: the shortest, the longest, and the most likely time you’ll keep the loan.
How a temporary buydown works
A temporary buydown lowers your payment for the first years of the loan only. The most common version is the 2-1 buydown: your rate is 2 percentage points below the full rate in year one, 1 point below in year two, and at the full rate from year three on.
The money to cover the difference is paid upfront, usually by the seller, the builder, or the lender, and held in an account that tops up your payments during the buydown period.
Here’s the same $400,000 loan with a full rate of 7.00% (example rates):
| Year | Your rate | Monthly payment | Lower than full payment by |
|---|---|---|---|
| 1 | 5.00% | about $2,147 | about $514 |
| 2 | 6.00% | about $2,398 | about $263 |
| 3 to 30 | 7.00% | about $2,661 | nothing |
Covering those two years costs about $9,300. That’s real help while you settle in, but from year three on, you pay the full rate for the rest of the loan.
One rule surprises many buyers: under Fannie Mae’s guidelines, the lender must qualify you at the full note rate, not the bought-down rate. A temporary buydown doesn’t help you qualify for a bigger loan. You need to be able to afford the full payment from the start.
Should you ask the seller to pay for it?
In a slower market, sellers and builders often offer concessions, and a buydown is one way to use them. The trade-off is between a lower payment now and a lower price.
Using the same $9,300 in the example above:
- As a 2-1 buydown: about $514 a month off in year one, $263 in year two, then nothing.
- As a price reduction: the loan amount drops by about $9,300, which lowers the payment by about $62 a month for all 30 years.
Neither is automatically better. The buydown helps most if your first two years are financially tight. The price cut helps most if you’ll keep the home a long time. A permanent buydown with points, funded by the seller, is a third option that lowers your rate for the full loan.
There are limits on how much a seller can contribute. For conventional loans, Fannie Mae caps contributions from interested parties (such as the seller, builder, or real estate agent) based on your down payment, calculated on the lower of the sales price or appraised value:
| Property | Loan-to-value ratio | Maximum interested-party contribution |
|---|---|---|
| Main home or second home | Over 90% (less than 10% down) | 3% |
| Main home or second home | 75.01% to 90% | 6% |
| Main home or second home | 75% or less (25% or more down) | 9% |
| Investment property | Any | 2% |
Buydown costs paid by the seller count toward these limits. Federal Housing Administration (FHA), Department of Veterans Affairs (VA), and U.S. Department of Agriculture (USDA) loans have their own rules; ask your lender.
Points and taxes
Under IRS rules (Publication 936), points paid to buy your main home can often be deducted in full in the year you pay them if you meet a set of tests, and points the seller pays are treated as if you paid them. Points paid to refinance are generally deducted over the life of the loan instead. This only helps if you itemize deductions, so talk to a tax professional about your situation.
Frequently asked questions
How much does one mortgage point cost?
One point costs 1% of your loan amount. On a $300,000 loan, one point is $3,000.
How much does one point lower my rate?
It varies by lender, loan type, and market conditions. There’s no fixed rule, so ask each lender for its specific options and compare offers with the same number of points.
Is a 2-1 buydown better than paying points?
They solve different problems. A 2-1 buydown lowers your payments for the first two years only. Points lower your rate for as long as you keep the loan. If you plan to keep the loan for many years, points usually deliver more total savings; if you need help with early payments, a temporary buydown targets that.
Do I lose the money if I refinance?
Yes, any savings you haven’t yet earned back. If you refinance before reaching the break-even point, the unrecovered cost of points is lost. With a temporary buydown, any unused buydown funds are typically handled according to your buydown agreement; ask your lender before closing.
Sources
- Consumer Financial Protection Bureau: How should I use lender credits and points (also called discount points)?
- Fannie Mae Selling Guide: B2-1.4-04, Temporary Interest Rate Buydowns
- Fannie Mae Selling Guide: B3-4.1-02, Interested Party Contributions
- IRS: Publication 936, Home Mortgage Interest Deduction
Example payments are principal and interest only, using illustrative rates. Information here is general guidance, not financial or tax advice. Confirm the details of any offer with your lender.