The "Point" Strategy: When to Buy Down Your Mortgage Rate

The "Buy Down" Strategy

In today's market, you will often hear lenders ask: "Do you want to pay points?"

Paying "Discount Points" simply means paying an upfront fee at closing to permanently lower your interest rate. One point is equal to 1% of your loan amount.

Quick Definition

1 Point = 1% of your loan amount. On a $500,000 loan, one point costs $5,000. In exchange, your lender typically reduces your interest rate by 0.25% to 0.375% for the life of the loan.

The Break-Even Analysis

Before you spend $5,000 or $10,000 on discount points, you need to calculate your "Break-Even Period."

Real Example: The Math

Upfront Cost

Paying $4,000 upfront in discount points

Monthly Savings

Saves you $100/month on your payment

The Math

$4,000 ÷ $100 = 40 months

The Verdict:

If you plan to refinance or sell the home within 3 years (36 months), buying points is a waste of money.
If this is your "forever home," buying points is a brilliant investment that yields returns for 30 years.

Calculate Your Break-Even Point

Loan Amount

Cost of Points

Monthly Savings

Your Break-Even Period:

months (4.2 years)

When Buying Points Makes Sense

Forever Homes

If you're buying your dream home in California or Hawaii and plan to stay for 10+ years, paying points can save you tens of thousands of dollars over the life of the loan.

High-Rate Environments

When rates are above 6-7%, the monthly savings from buying down your rate are more substantial, making the break-even period shorter.

Cash-Rich Buyers

If you have extra cash after your down payment and closing costs, investing it in discount points often yields better returns than keeping it in a savings account.

The Temporary Buydown (2-1 Buydown)

Another option for sellers in California and Hawaii is offering a "2-1 Buydown." This allows the seller to pay for your rate to be 2% lower the first year and 1% lower the second year. This is often better than a price reduction.

2-1 Buydown Example

Year 1

Rate reduced by 2%

5.0%

(instead of 7.0%)

Year 2

Rate reduced by 1%

6.0%

(instead of 7.0%)

Year 3+

Normal rate

7.0%

(full rate)

Why sellers love this: Instead of dropping the price by $10,000, they can offer a 2-1 buydown that costs them less but makes your offer more attractive. You get lower payments when you need them most (during the first two years of homeownership).

Common Mistakes to Avoid

Paying points when you plan to refinance soon. If rates drop and you refinance within 2-3 years, you'll lose the money you spent on points.
Not comparing lender credits. Some lenders offer "negative points" (lender credits) that increase your rate but reduce closing costs. This can be better for short-term ownership.
Confusing discount points with origination points. Origination points are lender fees and don't lower your rate. Only discount points reduce your interest rate.

The Bottom Line

Paying discount points can be a smart financial move—but only if the math works for your specific situation. The key is understanding your break-even period and honestly assessing how long you plan to keep the loan.

Confused by the math? Use the calculator above or contact me for a custom break-even analysis tailored to your California or Hawaii home purchase.

Get a Custom Points Analysis

Let's run the numbers together and determine if buying points makes sense for your specific loan scenario.

Calculate Your Buying Power Contact John Today

Should You Pay "Points" to Lower Your Rate? The Math Explained.