Mortgage Points: When Buying Down Your Rate Pays Off
A point costs 1 percent of the loan and buys a lower rate. Whether that is a good trade comes down to one calculation.
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One discount point equals 1 percent of the loan amount, paid at closing, in exchange for a lower interest rate — commonly a reduction of 0.125 to 0.25 percentage points, though the ratio varies by lender and day.
The breakeven
Divide the cost of the points by the monthly payment savings. On a $400,000 loan, one point costs $4,000. If it lowers the rate from 6.75 percent to 6.5 percent, the payment drops about $66 a month, and the breakeven is roughly 61 months — just over five years.
When points make sense
- You will keep the loan well beyond the breakeven period
- Rates are high and you expect to hold rather than refinance soon
- You have cash beyond a comfortable reserve
- The seller is paying — seller-paid points are common and cost you nothing
When they do not
- You may sell or refinance within the breakeven window
- The cash would otherwise be your emergency fund
- You are close to a loan-to-value threshold where a larger down payment would eliminate PMI — usually a better use of the same money
Temporary buydowns are a different product
A 2-1 buydown reduces the rate by 2 percentage points in year one and 1 point in year two, then reverts to the note rate. These are frequently seller- or builder-funded. The important thing to verify is that you qualify at the full note rate, not the introductory rate, and that you can afford the payment in year three.
Lender credits: points in reverse
You accept a higher rate and the lender pays some of your closing costs. This is the right structure when cash is tight or when you expect a short holding period. The same breakeven math applies in reverse.
Tax treatment
Points paid to reduce the rate on a primary residence purchase are often deductible in the year paid if certain conditions are met; points on a refinance generally must be deducted over the life of the loan. Rules are specific — consult a tax professional.
Frequently asked questions
How much does one point lower the interest rate?
Commonly 0.125 to 0.25 percentage points, though it varies by lender and market conditions. Ask for the specific rate at zero, half, and one point.
Are mortgage points refundable if I refinance?
No. Points paid are gone, which is why the breakeven period matters so much.
Can the seller pay my points?
Yes, within the seller concession limits of your loan program. This is a common negotiation, particularly in slower markets.
Editorial note. This article is educational and is not financial, tax, or legal advice. Loan terms, rates, insurance costs, and tax rules vary by lender, state, and individual circumstance. Figures shown are illustrative. Confirm details with a licensed lender, tax professional, or attorney before making a decision.
