Understanding Mortgage Points: Should You Buy Down Your Rate?

If you’re shopping for a mortgage, you’ve likely seen options to pay upfront to lower your interest rate. That’s called buying points or a rate buy down. This mortgage points guide will explain what points are, when a rate buy down makes sense, and whether it’s right for you—using everyday language and real-world examples so it feels more like friendly advice than an AI lecture.

Table of Contents

What Are Mortgage Points?

Mortgage points (aka discount points) are prepaid interest paid at closing:

1 point = 1% of your loan amount
Typically reduces your rate by 0.125–0.25% per point, depending on lender and market conditions
Example: On a $300,000 loan, one point ($3,000) might lower your rate from 7.00% to 6.75%

This upfront cost reduces your monthly payment—and could save you a lot over time.

Why Buyers Use Points

🔁 Lower Monthly Payments

Even small rate reductions can cut your monthly payment noticeably. For example, paying $3,000 now to save $48 a month breaks even in about 63 months—after that, you’re ahead.

💵 Long-Term Interest Savings

Points can save you $17,000–$40,000 in interest over 30 years on a $350,000 loan.

Qualify for a Mortgage

Lower monthly payments can improve your debt-to-income ratio, which helps you qualify, especially if you’re tightening the numbers .

🧠 Lock in a Rate

Buying points makes sense if rates are low and you plan to stay in the home long-term—even if refinancing becomes unlikely .

How to Calculate Break-even

Cost of points: $3,000
Monthly savings: $48
Break-even time: $3,000 ÷ $48 ≈ 63 months (~5.25 years)
If you keep the loan longer than 5.25 years, buying points pays off.

Types of Rate Buydowns

🔁 Permanent Buydowns

You pay upfront to lock in a lower rate for the life of the loan. Ideal if you’re staying long-term.

⏳ Temporary Buydowns

1-0 buydown: 1% lower rate for year one
2-1 buydown: 2% off year one, 1% off year two, then standard rate
Often funded by a home builder or seller, ideal for easing into mortgage payments.

When Buying Points Makes Sense

You plan to stay past the break-even point (5+ years).
You have extra cash at closing, beyond your down payment.
You’re looking for lower monthly payments and can afford the upfront cost.
You want to avoid refinancing later, so locking in low rates now is wise .

When It Might Not Pay Off

You’ll move or refinance before break-even.
You need your cash for repairs, emergencies, or investments.
Monthly savings are too small to justify the upfront cost.
Interest rates are likely to drop soon, making refi more cost-effective than points .

A Real-World Scenario

Imagine a $300K mortgage at 7%:

No points: $1,996/month
1 point ($3K): drops to 6.75% → payment $1,946 → saves $50/month, break-even in 60 months

After five years, you’re paying less and continue savings long-term.

Smart Tips for Your Decision

Run the numbers: Use lenders’ calculators or online tools .
Shop lenders: Compare rates and point costs—some rate offers may include hidden points.
Ask sellers/builders: They may fund points as incentives.
Check tax benefits: Points are mortgage interest and may be deductible.
Think resale: If you might sell or refinance in the near future, passing on points could be wiser.

Points in Today’s Market

Mortgage rates today hover near 7% . In this high-rate environment, points can offer monthly relief—but only if you plan to hold the loan long-term. Builders are offering buydowns on new construction around 4% of homes, giving buyers early relief .

Your Decision Flow

Estimate how long you’ll stay in the home.
Calculate break-even with points.
Evaluate cash flow: do you have reserves?
Compare lenders: same rate but varying point costs?
Negotiate: ask buyers to cover points.
Review your Loan Estimate: ensure points truly lower the rate.
Consider refinancing in a few years if rates drop—but remember you’d pay again.

Final Takeaway

Buying mortgage points can make sense if:

You’re in a higher-rate market (around 7%).
You plan to stay in the home long-term.
You have cash to spare at closing.
You want immediate lower payments and maximize lifetime savings.

Otherwise, it may be smarter to keep your cash, take the higher rate now, and refinance later when rates fall.