Buying down your rate means paying upfront cash to lower the interest you pay over the life of the loan
When you buy down an interest rate, you pay discount points (also called mortgage points) to the lender at closing. Each point typically costs 1% of your loan amount and lowers your rate by roughly 0.25%, though the exact reduction varies by lender and market conditions. A $300,000 loan would cost $3,000 per point. You decide upfront whether the monthly savings are worth the cash outlay.
The math is straightforward: lower rate means lower monthly payment, but you spend real money today to get there. Whether it makes sense depends on how long you plan to stay in the home and what interest rates are available without points.
Key Takeaways
- One discount point costs 1% of your loan amount and typically reduces your rate by 0.25% to 0.5%.
- You break even on the upfront cost only if you stay in the home long enough for monthly savings to add up to what you paid.
- The break-even period is usually between 5 and 10 years, depending on how many points you buy and how much your rate drops.
- You can buy down the rate on a purchase, refinance, or construction loan, but the cost-benefit calculation is different for each.
How the cost-benefit calculation works
To know whether buying points makes sense, you need to find your break-even point — the month when your total monthly savings equal what you paid upfront. Start by calculating your monthly payment at the original rate and at the reduced rate using a mortgage calculator. Subtract the lower payment from the higher one to find your monthly savings.
Then divide the cost of the points by your monthly savings. If you pay $3,000 for points and save $75 per month, you break even after 40 months (about 3.3 years). If you plan to sell or refinance before that, buying points costs you money. If you plan to stay longer, you come out ahead.
For example: a $300,000 loan at 7% costs $1,996 per month. At 6.75% (one point down), it costs $1,948 — a $48 monthly savings. One point cost $3,000, so you break even after 62.5 months (just over 5 years). If you sell in year 3, you lose $1,512. If you stay 10 years, you save $2,760.
Typical point costs and rate reductions across loan types
The relationship between points and rate reduction is not fixed. It changes based on overall market interest rates, your credit score, loan amount, and the lender. In a high-rate environment, one point might buy you 0.25% off. In a low-rate environment, it might buy you 0.5% off. Your lender will show you the exact trade-off when you lock your rate.
On a purchase mortgage, you can buy points at closing using cash from your down payment funds, a gift, or a loan credit. On a refinance, you can roll the point cost into the new loan balance, which means you do not pay cash upfront but you owe more principal. On a construction loan, points are usually paid at closing when the permanent mortgage funds.
Some lenders offer lender credits instead — the lender pays some of your closing costs in exchange for a higher rate. This is the opposite trade-off: you pay less upfront but accept a higher monthly payment.
When buying points usually makes financial sense
Buying points is most attractive when you plan to stay in the home for at least as long as your break-even period. If you are buying a primary residence you intend to keep for 7+ years, the math often works. If you are buying an investment property you plan to hold long-term, it can work even better because the monthly savings compound over decades.
Points also make sense if you are refinancing and your break-even period is short — say, 3 to 4 years — because refinances are often done when rates drop significantly, creating larger monthly savings per point. A refinance where you save $200 per month breaks even on a $3,000 point cost in just 15 months.
Buying points makes less sense if you are a first-time buyer with limited cash reserves, because that money might be better kept as an emergency fund. It also makes less sense if you are uncertain about how long you will stay, or if you are buying in a market where home prices are volatile and you might need to sell quickly.
How to compare point offers from different lenders
When you get loan estimates from multiple lenders, each will show you a different rate-and-points combination. One lender might offer 6.75% with 1 point; another might offer 7% with 0 points. To compare fairly, calculate the total cost of each loan over the time you plan to keep it.
Use the loan estimate form (which lenders are required to provide within 3 business days of your application). It shows the interest rate, the number of points, the dollar cost of points, and the monthly payment. Multiply the monthly payment by the number of months you plan to own the home, add the upfront point cost, and compare the total. The lowest total cost is your best deal for your timeline.
Do not compare rates alone — a 6.5% rate with 2 points might cost you more over 5 years than a 6.75% rate with 0 points, even though the first rate is lower. The loan estimate makes this visible if you do the math.
When you should not buy points
If your break-even period is longer than you plan to own the home, buying points is a loss. If you are selling in 3 years and your break-even is 6 years, skip the points. If you are refinancing and rates might drop further soon, buying points locks you into a rate that could become uncompetitive — you might refinance again and waste the point cost.
If you have limited cash and need to preserve reserves for repairs, taxes, insurance, or emergencies, do not stretch to buy points. The monthly savings are not worth the financial stress. If you are uncertain about your job, your timeline, or the housing market, the flexibility of keeping cash is worth more than the rate reduction.
Buying points also does not make sense if you are getting a lender credit that covers your closing costs. In that case, you are already getting a trade-off — a higher rate in exchange for lower upfront costs — and buying additional points on top of that compounds the cost.
How to structure points into your offer or loan
On a purchase, you can ask the seller to pay for points as part of the negotiation. This is called a seller concession or seller credit. The seller pays the lender directly at closing, and you get the lower rate without spending your own cash. Sellers are more likely to agree in a buyer's market or if your offer is otherwise strong.
On a refinance, you can roll points into the loan balance. Instead of paying $3,000 in cash at closing, you borrow an extra $3,000 and pay it back over the loan term with interest. This delays the cost but increases the total amount you owe. It makes sense if you do not have cash on hand and your break-even period is still short enough to justify the extra interest.
Some lenders allow you to buy a partial point — say, 0.5 points instead of 1 — to fine-tune the rate-and-cost trade-off. Ask your lender what increments they offer.
Frequently Asked Questions
Can I buy down my rate after I close on the loan?
No. Points must be paid at closing. After closing, your rate is locked in for the life of the loan (unless you refinance, which is a new loan with its own point decision). If you regret not buying points, refinancing is your only option, but that comes with new closing costs and a new break-even calculation.
Do I have to buy a whole point, or can I buy a fraction?
Most lenders allow you to buy in 0.125 or 0.25 increments — so 0.5 points, 1.25 points, and so on. Ask your lender what increments they support. Fractional points cost proportionally less and reduce your rate proportionally less, giving you more flexibility to hit your target rate.
What if I buy points and then refinance a few years later?
The points you paid on your original loan are gone — they do not transfer to the new loan. If you refinance before your break-even point, you lose money on the original points. When you refinance, you face a new point decision on the new loan, with its own break-even calculation based on the new rate reduction and the new loan term.
Are discount points the same as origination points?
No. Origination points are a fee the lender charges for processing the loan (usually 0.5 to 1 point). Discount points are optional and lower your rate. You pay origination points regardless; discount points are your choice. Your loan estimate separates the two.
Can I deduct mortgage points on my taxes?
Points paid on a purchase mortgage for your primary residence may be deductible in the year you pay them, but rules vary based on how the loan is structured and your income. Points on a refinance are deducted over the life of the loan, not all at once. Consult a tax professional about your specific situation.