Should You Buy Down Your Mortgage Rate? When Paying Points Makes Sense—and When It Doesn't
When mortgage rates are higher than buyers would like, one of the first questions I hear is:
"Can I just pay something upfront to get a lower rate?" Yes. It's called paying discount points—or "buying down" your interest rate. But just because you can buy a lower rate doesn't necessarily mean you should.
What Are Mortgage Points?
Discount points are essentially prepaid interest. You pay additional money at closing in exchange for receiving a lower interest rate on your mortgage.
One point equals 1% of your loan amount.
So on a $400,000 mortgage:
1 point = $4,000
How much that $4,000 lowers your rate depends on current market pricing. Historically, 1 point has often bought the rate down by 0.25%, however this is not a universal formula and can vary based on market conditions and dynamics. This is where mortgage pricing gets about as straightforward as comparing airfares across multiple carriers and different travel dates.
The Question Most Buyers Forget to Ask
The question isn't: "How much lower can I get my rate?"
It's: "How long will it take me to recover the money I spent getting that lower rate?"
That's your break-even point.
Suppose paying $5,000 in points saves you $100 per month.
$5,000 ÷ $100 = 50 months.
You would need to keep that mortgage for a little over four years before the monthly savings recovered your upfront cost. After that, you're ahead. Before that, you're not.
Why Your Time Horizon Matters
Let's say you pay thousands of dollars to permanently reduce your rate and then two years later:
You sell the house
You relocate
You refinance
Rates fall significantly
That beautifully discounted interest rate disappears along with your original mortgage and the points you paid to get it. You don't get a punch card where your fifth mortgage rate buydown is free. That's why I want buyers thinking strategically beyond just seeking the lowest rate.
When Paying Points Can Make Sense
Buying down the rate may be attractive if you expect to keep the mortgage for a long time and have plenty of cash remaining after closing. It can also make sense when someone else is helping pay the cost. For example, if a seller is willing to provide a closing-cost credit, using some of that money toward a rate buydown may create meaningful monthly savings.
That's very different from draining your own emergency savings just to make the rate and payment look a little prettier.
Temporary Buydowns Are Different
You'll also hear terms about temporary buydowns, like 2-1 buydown or 1-0 buydown. These temporarily reduce the borrower's payment during the first one or two years rather than permanently changing the note rate.
For example, with a 2-1 buydown, payments are generally calculated using a rate 2 percentage points below the note rate during year one and 1 percentage point below during year two before reaching the full payment in year three. These are often funded by sellers or builders and can be useful in the right situation. But temporary and permanent buydowns are two very different strategies.
Key Takeaway
Don't buy a mortgage rate simply because a lower number feels better. Run the math.
Ask: How much does this cost?
How much does it save each month? What's my break-even point? How likely am I to keep this mortgage beyond that point?
Sometimes paying points is a great investment.
Sometimes you're spending $5,000 today to save money on a mortgage you may refinance before you've recovered the $5,000.
A lower rate is nice.
A better financial strategy is nicer.
-Brian Kimball, Sr. Mortgage Advisor/Team Leader, The Lighthouse Group at Waterstone Mortgage