Mortgage Points Explained: Should You Buy Down Your Rate?

When you receive a mortgage quote, you will often see an option to pay discount points to lower your interest rate. Most buyers accept or decline this without understanding whether it actually saves them money. Here is how it works.

What Are Discount Points

A discount point equals 1% of the loan amount paid upfront at closing in exchange for a reduction in your interest rate. The amount your rate drops per point varies by lender, loan type, and market conditions — typically 0.125 to 0.25% per point.

Example: On a $400,000 loan, one point costs $4,000 upfront. If that reduces your rate from 7.0% to 6.75%, your monthly payment drops by approximately $65 per month.

The Break-Even Calculation

Break-even in months = Upfront cost of points divided by monthly payment savings.

Using the example above: $4,000 divided by $65 equals approximately 62 months — just over five years. If you stay in the home and keep the loan beyond five years, you come out ahead. If you sell, refinance, or pay off the loan earlier, you lose money on the points.

When Buying Points Makes Sense

You plan to stay long-term — ten years or more — and are confident you will not refinance. Rates are elevated and you expect to hold rather than refi when rates drop. You have surplus closing funds and the break-even aligns with your holding horizon.

When Points Do Not Make Sense

You plan to sell within five years. You expect to refinance if rates fall. You are cash-constrained and the upfront cost strains your reserves. You are buying an investment property with a defined shorter hold period.

Temporary Rate Buydowns

A 2-1 buydown reduces your rate by 2% in year one and 1% in year two before settling at the note rate for the remaining term. Seller-paid buydowns can make this a no-cost option to the buyer — often a better use of seller concessions than a price reduction.

At East Coast Mortgage, we model points scenarios for every borrower so you can make a fully informed decision. Book a call to review your options.