Background and quick orientation

Mortgage points are a pricing tool lenders use to move interest rates and closing costs. One point equals 1% of the loan amount and can be paid by the borrower (a “discount point”) to reduce the interest rate, or offered by the lender as a credit in exchange for a higher rate. These choices change two things most homeowners care about: monthly payment size and upfront cash required.

In practice I’ve worked with buyers who treat points as an investment and others who treat them as a liquidity decision. Both are valid—what matters is the math and your timeline.

How do buy downs and lender credits actually work?

• Buy down (discount points): You pay cash at closing. Each point costs 1% of the loan amount and typically lowers the interest rate by a lender-specific amount (commonly about 0.125%–0.25% per point on many 30‑year fixed loans, though this varies by market and loan product). The result: lower monthly principal-and-interest payments and less total interest over the life of the loan.

• Lender credits: The lender pays part or all of your closing costs up front in exchange for you accepting a higher note rate. That increases your monthly payment and the total interest you’ll pay over time, but reduces what you must bring to the table at closing.

• Temporary vs permanent buydowns: A permanent buydown reduces the interest rate for the full loan term. Temporary buydowns (for example, a 2‑1 buydown) reduce the rate for an initial period (often the first one to three years) and then reset to the note rate. Sellers or builders sometimes fund temporary buydowns.

Authoritative notes: The Consumer Financial Protection Bureau explains how discount points work and how they affect mortgage costs (consumerfinance.gov). For tax treatment of points, the IRS provides guidance on when mortgage points are deductible (see IRS information on points). Always check product specifics with your lender.

Real-world calculation examples

Example 1 — Buy down with a permanent point purchase

• Loan amount: $300,000
• Market rate: 4.50% (30‑year fixed)
• Cost of 1 point: 1% of loan = $3,000
• Typical rate reduction per point (example): ~0.25% → new rate = 4.25%

Monthly principal & interest at 4.50% = $1,520.06. At 4.25% = $1,476.02. Monthly savings ≈ $44.04.
Break-even months = $3,000 / $44.04 ≈ 68 months (≈ 5.7 years).

If you plan to stay longer than the break-even horizon, buying the point makes financial sense on interest savings alone. If you sell or refinance sooner, you typically won’t recoup the outlay.

Example 2 — Lender credit to cover closing costs

• Closing costs: $5,000
• Borrower accepts a slightly higher rate (for example, 4.75%) and receives lender credits that cover $5,000.

Tradeoff: You avoid paying $5,000 at closing, but your monthly payment and lifetime interest rise. If you need cash for a remodel, moving expenses, or reserve funds, the credit can be the better choice.

Example 3 — Temporary 2‑1 buydown funded by seller

• First year the interest rate is 2% below note rate, second year 1% below, then it returns to the permanent note rate. This can ease initial cashflow for new buyers but provides only short-term relief.

Who benefits most from each choice?

• Buy down points are best if:

• You have extra cash at closing and a long expected ownership horizon (usually longer than the break-even period).

• You’re trying to qualify for a loan at a lower monthly payment (e.g., to pass debt-to-income limits).

• You prioritize minimizing lifetime interest cost.

• Lender credits are best if:

• You need to conserve cash for the down payment, moving, renovations, or emergency savings.

• You plan to move or refinance within a few years (short ownership horizon).

• You prefer liquidity over long-term interest savings.

Eligibility notes: Most conventional, FHA, VA, and USDA lenders offer points and credits, but amounts, rate adjustments, and caps vary by investor overlays and product type. Lenders may also tie point pricing to credit score tiers, loan-to-value (LTV), and loan program.

Practical decision steps (a checklist I use with clients)

1. Get the exact lender price sheet: ask the loan officer to show the rate grid and the credit/point chart for your credit score and LTV.
2. Calculate the cost of points: points cost = loan amount × points (in decimals). Example: 2 points on $250,000 = $5,000.
3. Compute monthly savings from the lower rate and the break-even period: break-even months = points cost ÷ monthly payment reduction.
4. Compare to your time horizon: if expected ownership > break-even, buying points often wins financially.
5. Consider liquidity needs and reserves: if paying points would deplete emergency savings, credits may be wiser.
6. Factor taxes: some points may be deductible in the year paid if they meet IRS tests; otherwise, they may have to be amortized (see IRS guidance).
7. Run sensitivity scenarios: a small change in market rates or your move date can flip the recommendation.

Common mistakes and misconceptions

• Mistake: Assuming 1 point always equals a 0.25% rate drop. Reality: rate reductions per point vary widely by lender, loan product, and market.
• Mistake: Buying points with cash that should be in emergency savings. Never weaken your short-term financial safety for a theoretical long-term saving.
• Misconception: Lender credits are always a bad deal. They can be the right choice if you need cash now or expect to refinance soon.
• Overlooking APR: The APR captures upfront costs and the note rate, and it’s useful for comparing offers, but APR assumes you hold the loan to its term and may not reflect temporary buydowns.

Frequently asked questions

Q: How much does one point reduce my rate?
A: There’s no universal rule. Many lenders price one point to reduce a 30‑year fixed rate roughly 0.125%–0.25%, but the actual change depends on the lender’s rate sheet and market conditions.

Q: Are points refundable if the loan doesn’t close?
A: No — paid discount points and many lender fees are generally nonrefundable. Always confirm refundable status in writing.

Q: Are points tax deductible?
A: Points paid to buy down the interest rate on your primary residence may be deductible in the year they’re paid if they meet IRS conditions; points paid on a refinance are typically amortized over the life of the loan. See the IRS guidance on deducting points for details (irs.gov).

Q: Can I combine lender credits and a buy down?
A: Often you choose one primary strategy. Some lenders permit partial combinations, but combining reduces the net benefit and is subject to lender pricing rules.

How I run the numbers with clients (practical tip)

When advising borrowers I always produce a two-column comparison: (A) pay points today and (B) take lender credits and invest the saved cash at a conservative return. We model total cost at 3, 5, 7, and 30 years and include break-even months. This exposes whether the decision is a cash-flow choice or a true interest-cost arbitrage.

Related articles and further reading

• For a deeper discussion of buydowns vs. long-term cost, read our article on mortgage rate buydowns: “Mortgage Rate Buydowns: Short-Term Relief or Long-Term Cost?” (https://finhelp.io/glossary/mortgage-rate-buydowns-short-term-relief-or-long-term-cost/).
• If timing and rate locks matter to your decision, see: “How Mortgage Rate Locks Work and When to Extend Them” (https://finhelp.io/glossary/how-mortgage-rate-locks-work-and-when-to-extend-them/).
• When comparing alternatives to refinancing for monthly-payment relief, consider “When to Recast Your Mortgage Instead of Refinancing” (https://finhelp.io/glossary/when-to-recast-your-mortgage-instead-of-refinancing/).

Professional disclaimer

This article is educational and does not constitute personalized financial, tax, or legal advice. Rules about deducting points and other tax treatments change; consult a qualified tax advisor or CPA for tax-specific questions and a licensed mortgage professional for rate sheets and product-specific details.

Authoritative sources and further reading

• Consumer Financial Protection Bureau — What are mortgage points? (see consumerfinance.gov)
• Internal Revenue Service — Guidance on deducting mortgage points and related tax rules (see irs.gov)
• U.S. Department of Housing and Urban Development and mortgage program guides for FHA/VA borrower rules

In my 15 years advising mortgage borrowers, the right answer is almost always the one that matches the borrower’s timeline and liquidity needs. Use the break-even math, confirm lender pricing in writing, and verify tax treatment with a tax professional before you pay points or accept credits.