The basics of buying down your rate

Buying down your interest rate means paying money upfront—called discount points or just points—to lower the interest rate on your loan for its entire life. One point typically costs 1% of your loan amount and usually lowers your rate by 0.25%, though this varies by lender and market conditions. You pay points at closing, and in return you get a smaller monthly payment and pay less interest overall.

Whether this makes financial sense depends on three things: how much the points cost, how much your payment drops, and how long you plan to keep the loan. If you sell or refinance before you break even on the upfront cost, you lose money on the deal.

Key Takeaways

  • One discount point costs roughly 1% of your loan amount and typically lowers your rate by 0.25%, though both figures vary by lender and market.
  • You break even on points when the monthly savings add up to equal what you paid upfront—this usually takes 5 to 10 years depending on the numbers.
  • Buying points only makes sense if you plan to stay in the home or keep the loan long enough to recoup the upfront cost.
  • Your lender must disclose the exact cost of each point and the resulting rate in writing before closing, so you can calculate the break-even point yourself.

How much one point actually costs

A single point costs 1% of your total loan amount. On a $300,000 mortgage, one point costs $3,000. On a $200,000 loan, it costs $2,000. This is straightforward math, but the actual rate reduction you get for that $3,000 varies.

Most lenders will tell you that one point drops your rate by 0.25%, but some lenders offer 0.375% or even 0.5% per point depending on the loan type, your credit score, and current market conditions. A lender might also offer you a choice: buy one point for a 0.25% drop, or buy two points for a 0.375% drop per point. Always ask what the exact rate reduction is for each point they're offering you, because the math changes if one lender gives you more for your money than another.

Calculating your break-even point

The break-even point is the month when your monthly savings equal what you paid upfront. Until that month, you're still paying back the cost of the points. After that month, you're ahead.

Here's the math: Suppose you pay $3,000 for one point and your monthly payment drops by $50. You divide $3,000 by $50 and get 60 months, or 5 years. If you sell or refinance before month 60, the points cost you money. If you stay past month 60, you come out ahead.

Your lender can calculate this for you, but you should do it yourself too. Ask them for the exact monthly payment at the original rate and the exact monthly payment at the bought-down rate. Subtract one from the other. Divide the point cost by that difference. The result is how many months until you break even.

When buying points makes sense

Buying points is worth considering if you plan to stay in your home for at least as long as your break-even period, and ideally longer. If your break-even point is 7 years and you're confident you'll stay 10 or more years, the math usually works in your favor.

Points also make more sense when rates are high. If you're looking at a 7% rate and can buy it down to 6.75% for $3,000, and you're staying put, that's a real long-term savings. If rates are already low—say 3.5%—the monthly savings from one point might be only $20 or $30, which means a much longer break-even period and more risk that you'll move or refinance before you recoup the cost.

Buying points can also make sense if you're refinancing and the break-even period is short. A refinance break-even of 2 or 3 years is more realistic than a 7-year break-even on a purchase, because refinance rates and terms are different.

When buying points does not make sense

If you're uncertain how long you'll stay in the home, buying points is risky. Life changes—job moves, family situations, market conditions—can force you to sell or refinance sooner than you expected. If you break even in 6 years but move in year 4, you've paid $3,000 for a benefit you never received.

Points also don't make sense if you don't have the cash on hand. Some buyers stretch to afford points and end up with less money for closing costs, inspections, appraisals, or an emergency fund. If you have to borrow the money for points, the math almost never works out.

Finally, if you're a first-time buyer or your credit score is borderline, putting that $3,000 toward your down payment instead might be smarter. A larger down payment can lower your interest rate, reduce your loan amount, and help you avoid mortgage insurance—sometimes all three at once.

What your lender must tell you in writing

Before you close on any loan, your lender must give you a Loan Estimate that shows the interest rate, the cost of each point, and your monthly payment at that rate. If you're considering buying points, ask for a second Loan Estimate showing the rate with points, the new monthly payment, and the total cost of the points. Compare the two side by side.

The Loan Estimate must also show your total interest paid over the life of the loan at each rate. This is useful because it shows you the long-term cost difference, not just the monthly payment difference. A lower monthly payment that costs you $50,000 more in total interest over 30 years is not a good deal, even if the break-even math looks okay.

You'll also see points listed on your Closing Disclosure, which you receive three days before closing. This is your final chance to confirm the numbers match what you agreed to. If they don't, ask your lender to explain the difference before you sign.

Points versus other ways to lower your rate

Buying points is not the only way to get a lower rate. You can also shop between lenders—rates and point costs vary significantly. You can improve your credit score before applying, which can lower your rate without any points. You can put down a larger down payment, which often comes with a better rate. You can choose a shorter loan term, like 15 years instead of 30, which usually carries a lower rate.

Some lenders also offer lender credits, where the lender pays some of your closing costs in exchange for a slightly higher rate. This is the opposite of buying points. If you don't have cash for points but want to lower your closing costs, a lender credit might be worth exploring—though it means paying more interest over time.

The best choice depends on your situation. If you have cash, a long time horizon, and stable plans, points might save you money. If you're uncertain or cash-strapped, shopping for a better base rate or putting more down might be smarter.

Frequently Asked Questions

Can I buy points with money I'm borrowing?

Technically yes—some lenders allow you to roll the cost of points into your loan amount. But this defeats the purpose. You end up paying interest on the points themselves for 15 or 30 years, which usually means you never break even. It's almost always better to skip the points or find the cash from savings.

What if I refinance before I break even on my points?

You lose the money you paid for the original points. They don't transfer to the new loan. This is why break-even math matters so much—if you refinance in year 3 and your break-even was year 6, you've paid $3,000 for nothing. Some people factor in the possibility of refinancing and decide points aren't worth the risk.

Do I have to buy points in whole numbers?

No. You can buy 0.5 points, 1.5 points, or any fraction. The cost and rate reduction scale proportionally. If one point costs $3,000 and lowers your rate 0.25%, then 0.5 points costs $1,500 and lowers your rate 0.125%. This lets you fine-tune the trade-off between upfront cost and monthly savings.

Are mortgage points the same as origination points?

No. Origination points are a fee the lender charges for processing your loan—they don't lower your rate. Discount points are what lower your rate. Your Loan Estimate separates the two. You want to understand both, but only discount points are part of the buy-down decision.

Can I deduct points on my taxes?

On a purchase, you can deduct points over the life of the loan, not all at once. On a refinance, the deduction is more limited. Tax rules are complex and depend on your situation. Talk to a tax professional or accountant before assuming you can write off the cost of points.