How do interest rate buy-downs (points) work when refinancing?
Interest rate buy-downs, commonly called “points,” are a way to pay more at closing in exchange for a lower interest rate over the life of a refinanced mortgage. Each point normally equals 1% of the loan amount (so on a $300,000 refinance, one point = $3,000). Lenders set how much rate reduction each point buys, and that trade-off varies by lender and market conditions.
This article explains types of buy-downs, how to calculate break-even, tax treatment, real examples, common mistakes, and the documentation and negotiation steps you should take before paying points at refinance.
Types of buy-downs
- Permanent buy-down (single-price): You pay X points to reduce the loan’s note rate for the full term. Example: pay one point now and lower the rate permanently by about 0.25% (exact amount depends on lender pricing).
- Temporary or “2-1” buy-downs and staged buydowns: The interest rate is lower for the first one or two years and then resets to the note rate. These are less common at refinance than at purchase but may appear in negotiated deals.
- Seller- or lender-paid buydowns: A seller or lender covers all or part of the points. This is negotiated and will appear on the Loan Estimate and Closing Disclosure as lender credits or paid points.
How the math works (break-even and savings)
Work through three numbers: the points cost, the monthly savings from the lower rate, and how long you plan to keep the loan.
- Points cost = points × loan amount. Example: 2 points on $300,000 = 0.02 × $300,000 = $6,000.
- Monthly payment change = payment at original rate − payment at reduced rate. Use a mortgage calculator or the standard mortgage payment formula. A reliable shortcut is to run both scenarios on a lender amortization schedule.
- Break-even months = points cost ÷ monthly savings.
Example (rounded):
- Loan: $300,000, term: 30 years.
- Rate without points: 5.00% → monthly payment ≈ $1,610.
- Rate with 2 points: 4.00% → monthly payment ≈ $1,432.
- Monthly savings ≈ $178.
- Points cost = 2% × $300,000 = $6,000.
- Break-even = $6,000 ÷ $178 ≈ 34 months (about 2.8 years).
If you expect to keep the loan longer than the break-even period, the buy-down can save money over your ownership period. If you expect to sell or refinance again sooner, points may not be worth the cost.
Example scenarios and sensitivity factors
1) Small rate drop for a large loan: On bigger balances, a 0.25% or 0.5% rate reduction can create larger monthly savings, shortening the break-even time.
2) Rolling points into the loan: If you finance points by adding them to the loan balance, your monthly payment falls less than if you paid cash at closing because you’re borrowing the cost and paying interest on it. Always compare out-of-pocket purchase of points vs. financing them.
3) Changing rates and refinancing again: If market rates fall substantially, you might refinance again and never fully realize the benefits of the earlier buy-down. Consider your tolerance for re-refinancing events.
Tax treatment (what to expect)
Tax rules differ between points paid on a purchase loan and points paid on a refinance. For most refinances:
- Points paid to refinance are generally not deductible in full in the year paid. Instead, the IRS requires you to amortize (spread) the deduction over the life of the new loan. See IRS Publication 936 for details (IRS.gov).
- If you use part of the refinanced loan to improve your principal residence, the portion of points attributable to the improvements may be deductible in the year paid. Keep clear documentation and consult a tax professional for your situation.
For practical guidance, see the Consumer Financial Protection Bureau explanation of mortgage points and your tax advisor or IRS publications for the current year (CFPB; IRS Publication 936).
APR vs note rate: why points matter beyond monthly payment
- Note rate is the interest rate on your mortgage.
- APR (annual percentage rate) includes the note rate plus certain fees and the effect of points amortized over the loan. Paying points lowers your note rate but raises upfront costs, which can increase or lower the APR depending on the numbers.
Compare loans by both note rate and APR and make sure you understand the closing costs breakdown on the Loan Estimate. The Loan Estimate required by federal law will show points and how they affect your costs.
Where points show up and required disclosures
- Loan Estimate: Lenders must give a Loan Estimate within three business days after receiving an application; it lists origination charges and discount points.
- Closing Disclosure: Final details of points and credits appear here three business days before closing.
Always review these documents line-by-line. If you negotiated seller-paid points or lender credits, they must be disclosed.
Real-world considerations and best practices
- Run side-by-side amortization schedules for the loan with and without points. Use the exact loan amount, term, and lender pricing.
- Include all related costs: appraisal, title, prepayment penalties, and any mortgage insurance. A lower monthly payment may not mean net savings if you extend the term or incur other costs.
- If you plan to move or sell within a short window (for many buyers that is under 3–5 years), points are often not worthwhile.
- Ask the lender the exact rate reduction per point and whether there are lender credits that could offset costs. Lenders’ pricing models differ.
- Check whether points are refundable if a refinance falls through; often they are not.
Negotiation and alternatives
- Negotiate both the interest rate and number of points. Lenders often quote a few different rate/points combinations.
- Consider asking for seller concessions if you’re buying or for lender credits that lower closing costs in exchange for a slightly higher rate.
- Temporary buydowns (e.g., 2-1) can lower early payments without permanent points; weigh them if short-term cash flow is the priority.
Common mistakes to avoid
- Using only the monthly payment change without calculating break-even and tax effects.
- Financing points into the loan without recalculating the true break-even.
- Ignoring APR and the Loan Estimate; focusing only on the note rate.
Pro tips from practice
- I recommend every borrower get at least two written rate/points scenarios and run the break-even analysis before choosing points. In my practice advising homeowners, small differences in upfront costs often change the recommended plan.
- If you plan to stay in the home past the break-even point and want stable payments, paying points with cash at closing is usually the most cost-effective approach.
- Document everything: which portion of any refinance financed home improvements, any seller contributions, and the exact point schedule the lender used.
Additional resources
- CFPB: What are points on a mortgage, and are they worth it? https://www.consumerfinance.gov/ask-cfpb/what-are-points-on-a-mortgage-and-are-they-worth-it-en-1443/
- IRS Publication 936 (Home Mortgage Interest Deduction) — consult current-year guidance at https://www.irs.gov/
For deeper reading on refinance timing and the mechanics of different refinance types, see our guides on Refinancing 101: When to Refinance Your Loan and How Rate-and-Term Refinance Lowers Monthly Payments.
Internal links:
- Refinancing 101: When to Refinance Your Loan — https://finhelp.io/glossary/refinancing-101-when-to-refinance-your-loan/
- How Rate-and-Term Refinance Lowers Monthly Payments — https://finhelp.io/glossary/how-rate-term-refinance-lowers-monthly-payments/
Professional disclaimer
This article is educational and not personalized financial or tax advice. Tax rules and lender pricing change. Consult a qualified mortgage professional and tax advisor before making decisions about buying points or refinancing.
