Mortgage Points and Rate Buydowns: When Paying Upfront Pays Off

What a Mortgage Point Is

A mortgage point, also called a discount point, is an upfront fee you pay the lender to lower your interest rate. One point equals 1 percent of the loan amount, so on a 300,000 dollar loan, one point costs 3,000 dollars.

Each point typically reduces the rate by a fraction of a percent, often around a quarter point, though the exact amount varies by lender and market. You are essentially prepaying interest in exchange for a lower payment for the life of the loan.

The Break-Even Question

The decision comes down to break-even. Divide what the points cost by the monthly savings they buy, and you get the number of months it takes to recover the upfront cash. Pay 3,000 dollars to save 45 dollars a month and you break even in about 67 months, roughly five and a half years.

If you hold the loan past the break-even point, the buydown saves you money. If you sell or refinance before then, you lose. So the honest question is not what the rate is, but how long you realistically expect to keep this exact loan.

Why It Is Different for Investors

• Investors refinance more often, especially in BRRRR and value-add strategies, which shortens the holding window.
• Rate volatility means an investor may refinance well before break-even if rates drop.
• Points on an investment property are generally amortized over the loan term for tax purposes rather than deducted all at once.
• The upfront cash spent on points is capital that could otherwise go toward reserves or the next deal.

Temporary Buydowns vs Permanent Points

Permanent points lower the rate for the entire loan. Temporary buydowns, like a 2-1 buydown, reduce the rate for just the first year or two before it steps up to the note rate. Sellers sometimes offer temporary buydowns as a concession.

Temporary buydowns can ease early cash flow while you stabilize a property, but they are not a permanent fix. Underwrite the deal at the full note rate, not the teaser rate, so a property that only works during the buydown period does not become a problem when the rate resets.

Making the Call

Run the loan both ways: with and without points. Compare the payment, the total interest, and the break-even period against how long you plan to hold. Then weigh that against what the same cash would do if you kept it liquid or deployed it elsewhere.

Points make the most sense on loans you intend to hold for a long time at a rate you are happy to lock in. On a property you may refinance in two years, spending cash to buy the rate down is usually the wrong trade.

Frequently Asked Questions