Mortgage points and rate buydowns, explained
You can pay money upfront to lower your rate, or have a seller or builder pay it for you. Whether it is worth it comes down to one division.
Discount points: a permanent buydown
A discount point is prepaid interest. One point costs 1% of the loan amount, paid at closing, and lowers your interest rate for the life of the loan. How much each point lowers the rate is set by your lender and changes daily with the market — ask for a quote at several point levels side by side.
Points are different from origination charges, even though both can be expressed as a percentage. Your Loan Estimate lists them separately.
The break-even test
Divide the cost of the points by the monthly payment saving. The answer is the number of months before the points pay for themselves. If you expect to keep the loan — not just the house — longer than that, points can pay off. If you might sell or refinance sooner, they usually don't.
| Example (replace with your quotes) | |
|---|---|
| Loan amount | $350,000 |
| Cost of 1 point | $3,500 |
| Monthly payment without points | From your lender |
| Monthly payment with 1 point | From your lender |
| Months to break even | $3,500 ÷ monthly saving |
Temporary buydowns
A temporary buydown lowers your payment for the first year or two, then the rate steps up to the note rate. In a 2-1 buydown the payment is figured at two percentage points below the note rate in year one, one point below in year two, and at the full rate from year three. The difference is paid upfront into an account that subsidizes your payments.
Temporary buydowns are popular with builders and motivated sellers because the cost is fixed and known. They help with early cash flow, but you must qualify at the full rate, and you should be comfortable with the full payment from year three — don't count on refinancing before then.
Getting someone else to pay
In Georgia, buyers commonly ask the seller to pay for points or a buydown as part of a seller concession. On new construction, builders frequently offer rate buydowns or closing-cost credits, often tied to using their preferred lender. See builder incentives.
A seller credit spent on a permanent buydown lowers your payment for as long as you keep the loan. The same credit spent as a price cut lowers your payment by much less. Have your lender run both.
Other ways to a lower rate
- Raise your credit score before applying — see credit score to buy a house.
- Compare more than one lender on the same day, at the same points.
- Look at homes with an assumable FHA, VA or USDA loan at an older rate — see assumable mortgages.
- Consider a shorter term if the payment fits.
Worked example: points versus a buydown versus a price cut
Imagine a seller agrees to give $10,000 on a $400,000 purchase with a $380,000 loan. There are three common ways to spend it. The figures below are placeholders; get each option priced by your lender on the same day.
- If the temporary buydown is not fully used — for example you refinance in year one — ask your lender what happens to the unused subsidy. Treatment varies.
- Points paid on a purchase loan may be tax-deductible; ask a tax professional about your situation.
| Use of $10,000 | What changes | Who it suits |
|---|---|---|
| About 2.6 discount points ($10,000 ÷ $3,800 per point) | Lower rate for the life of the loan | Buyers keeping the loan many years |
| Temporary 2-1 buydown | Lower payment in years 1 and 2 only | Buyers expecting income to rise |
| Price reduction to $390,000 | Loan falls by about $9,500 at 5% down | Buyers who want a lower balance |
| Closing-cost credit | Less cash to close | Buyers short on cash |
Questions to ask your lender
- What rate and payment do I get at zero, one and two points?
- How many months until each option breaks even?
- Does my loan program allow a seller or builder to pay for points or a buydown, and up to what limit?
- Am I qualified at the note rate or the bought-down rate?
- If a builder offers a buydown, is it available only with their preferred lender?
Reading points on the Loan Estimate
Points appear in Section A, Origination Charges, as a percentage of the loan and a dollar amount. Compare Loan Estimates with the same number of points, issued on the same day, or you are comparing different products. The APR on page three folds points and other lender charges into a single yearly figure; it is useful for comparing offers you plan to keep for the full term and less useful if you expect to sell or refinance early. Negative points — lender credits — work the other way: a slightly higher rate in exchange for the lender paying some of your closing costs.
Common questions
How much does one mortgage point cost?
One point costs 1% of the loan amount. How much it lowers your rate is set by the lender and varies, so ask for quotes at different point levels.
Are mortgage points worth it?
Divide the cost by the monthly saving to find your break-even. If you will keep the loan longer than that, points can be worth it; if you may sell or refinance sooner, usually not.
What is a 2-1 buydown?
A temporary buydown where the rate is effectively two points lower in year one and one point lower in year two, then the full rate from year three. The cost is paid upfront, often by a seller or builder.
Can the seller pay for my points?
Yes, through a seller concession in the contract, within the contribution limits of your loan program.
Read next
General information for Georgia home buyers, not legal, tax or lending advice. Loan programs, rates, limits, tax rates and insurance terms are set by lenders, agencies, counties and insurers and change — confirm current figures with them, and have your closing attorney review anything you sign.