Mortgage Points vs Rate Buydown: Cost-Benefit Analysis

Introduction

Choosing between mortgage points and a rate buydown is a core financing decision that affects monthly payments, total interest, and tax treatment. This guide explains how each option works, walks through break-even math, gives real-world examples, and provides rules of thumb to help you decide. I draw on more than 15 years advising homebuyers and refinancers to highlight practical traps and the calculations lenders may not show up front.

How mortgage points work

• What they are: A mortgage discount point (commonly called simply a “point”) equals 1% of the loan amount paid up front. Lenders typically quote point-to-rate changes, for example one point might reduce the interest rate by ~0.25 percentage points—but that relationship varies by lender and market conditions. This is a rule of thumb, not a guarantee.
• Permanent vs. temporary: Paying discount points usually yields a permanent rate reduction for the life of the loan, not just the initial years.
• Who pays and when: The borrower pays points at closing (though seller-paid points are possible and negotiated in the purchase contract).
• Typical use case: Buyers planning to keep the mortgage a long time and who have cash on hand to invest in lower long-term carrying costs.

How rate buydowns work

• What a buydown is: A buydown is any arrangement where the interest rate is reduced by paying additional fees or having a third party (seller, builder, or lender) contribute toward the interest for a defined period. Buydowns can be temporary (e.g., 2-1 buydown) or permanent.
• Temporary buydowns: Common structures include a 1-0.5 or 2-1 buydown where the interest rate is reduced by set amounts for the first one or two years before reverting to the note rate. These lower payments are usually funded at closing.
• Permanent buydowns: Less common but possible—these resemble paying discount points and result in a lower note rate for the life of the loan.
• Typical use case: Borrowers who need lower initial payments (for income ramp-ups, job transitions, or sale plans) or sellers/builders offering incentives to move inventory.

Key differences at a glance

• Duration of benefit: Points generally give a long-term rate reduction; temporary buydowns reduce payments only for a specified early period.
• Upfront cost vs long-term savings: Points often cost more upfront but may save more over decades; buydowns cost less upfront or are subsidized and save mostly early-year cash flow.
• Negotiability: Both are negotiable. A seller can pay points or fund a buydown as part of concessions.

Break-even math: how to compare costs

Step 1 — Convert cost to dollars

• Points: cost = percent points × loan amount. Example: 2 points on a $300,000 loan = 2% × $300,000 = $6,000.
• Buydown: cost = buydown fee charged by lender or contribution by a third party (often quoted as a lump sum).

Step 2 — Calculate monthly payment change

• Use the loan amortization formula or a mortgage calculator to find monthly payment at the offered note rate vs. the reduced rate.

Step 3 — Compute break-even

• Break-even months = upfront cost ÷ monthly payment savings.

Example 1 — Points on a 30-year fixed

• Loan: $300,000, note rate without points: 4.5% → monthly ≈ $1,520.
• Pay 2 points ($6,000) to lower rate to 4.0% → monthly ≈ $1,432.
• Monthly savings: $88. Break-even: $6,000 ÷ $88 ≈ 68 months (~5.7 years).
• If you expect to stay past 5.7 years, points make sense financially (ignoring tax effects and time value of money).

Example 2 — Temporary 2-1 buydown

• Same $300,000 loan with a 4.5% note rate: normal payment $1,520.
• 2-1 buydown might reduce rate by 2.00% first year, 1.00% second year, then revert to 4.5%.
• Year 1 payment could be roughly what a 2.5% rate would produce (materially lower), then step up. Because the benefit is limited to the initial years, total interest savings often do not exceed the cost unless you sell or refinance after the buydown years.

Important: include time value of money

• For accurate comparison, discount future savings to present value or compare total cash flows over your expected holding period. Use net present value (NPV) if you want a rigorous analysis.

Tax treatment and other rules

• Points on a purchase: In many cases, points paid to purchase your principal residence are deductible in the year paid if they meet IRS tests (they’re computed as a percentage of the loan amount, the amount is shown as points on the settlement statement, and other conditions). For specifics, see the IRS guidance on mortgage points (IRS) and the CFPB’s primer on points and fees (CFPB).
• Source: IRS (see “Points”), Consumer Financial Protection Bureau (CFPB).
• Points on refinancing: Points paid to refinance generally must be deducted over the life of the loan (amortized), not all up front.
• Buydown contributions: When a seller or builder pays a buydown fee, the payment is typically treated as a third-party-paid discount; tax treatment for the buyer follows similar rules to points depending on whether they are refinancing or purchasing and local tax law. Consult a tax professional for your situation.

Authoritative references: IRS and CFPB

• IRS — “Points” and mortgage interest guidance (review IRS.gov for current publication details) (IRS).
• Consumer Financial Protection Bureau — overview of mortgage points and how they affect loan cost (CFPB).

Scenarios: which option fits common goals

• You plan to keep the loan 10+ years and can pay cash at closing: buying points often delivers the biggest lifetime interest savings.
• You’ll own the home for a short time (3–6 years): a temporary buydown or taking a higher rate with no points is usually better because you may not recoup the upfront cost of points.
• You need lower initial payments (job change, parental leave, renovation): a temporary buydown eases early cash flow while you stabilize income.
• You can’t pay points but your seller/builder offers incentives: see whether they’ll pay for points or fund a buydown—either can lower early payments.

How I evaluate these choices in practice

In my practice I run three quick checks for every client:

1. Break-even months for points vs expected time in the house.
2. Cash flow impact in the first 24 months (to see affordability under stress).
3. Tax impact estimate: whether points are deductible up front or must be amortized.

Common mistakes and misconceptions

• Assuming 1 point = 0.25% rate reduction is fixed. Lender pricing varies with market conditions.
• Ignoring closing-cost trade-offs: paying points reduces your rate but increases cash needed at closing; that same cash might be used for an emergency fund.
• Forgetting tax treatment: mistakenly assuming all points are deductible in the year paid.

Practical checklist before signing

• Get itemized lender quotes showing the note rate with and without points and the exact cost of any buydown.
• Calculate break-even months and compare with your expected holding period.
• Ask whether the buydown is funded by you, the seller, or the builder and get the contribution documented.
• Confirm tax deductibility with your tax advisor and ensure points are listed on the settlement statement (HUD-1 or Closing Disclosure).
• Consider alternative uses for the cash (investments, emergency savings, home improvements) and compare expected returns.

Internal resources and further reading

• For a primer on discount points: What are Points (Discount Points)? — https://finhelp.io/glossary/what-are-points-discount-points/
• For technical details on buydowns and when to use them: Interest Rate Buydown — https://finhelp.io/glossary/interest-rate-buydown/
• For tax-focused guidance available on our site: Tax Deductibility of Points — https://finhelp.io/glossary/tax-deductibility-of-points/

Frequently asked (concise answers)

• Are points always worth it? Not always; they’re worth it only when your expected holding period exceeds the break-even period and you value the long-term savings over near-term liquidity.
• Can a seller pay my points? Yes—seller-paid points are common but usually negotiated into the purchase price or seller concessions.
• Will a buydown hurt my chance to qualify? Lenders still underwrite based on the note rate in most cases; a temporary buydown can help cash flow early but may not change qualifying if the lender uses the un-buoyed note rate for qualification. Confirm with your lender.

Conclusion

Mortgage points and rate buydowns both reduce interest costs but target different borrower needs: points are usually a long-term trade of cash now for lower ongoing payments; buydowns are a short-term or flexible approach to reduce early payments or subsidize affordability. Use break-even math, include tax treatment, and weigh alternative uses of your cash before choosing. For personalized decisions, consult a mortgage professional and a tax advisor.

Professional disclaimer

This article is educational and does not replace personalized tax, legal, or mortgage advice. Consult a qualified mortgage originator and a tax professional for recommendations tailored to your situation.

Authoritative sources

• Consumer Financial Protection Bureau (CFPB), “What are mortgage points?” — https://www.consumerfinance.gov/ask-cfpb/what-are-mortgage-points-en-107/
• Internal Revenue Service (IRS), guidance on points and mortgage interest — https://www.irs.gov/ (search “points” and “mortgage interest” for current publications)