Key Takeaways
This post is a 4 minute read.
One discount point costs 1 percent of your loan and lowers your rate for as long as you keep it.
A temporary buydown, like a 2-1, lowers your payment for the first one to three years only.
The break-even point is the cost divided by the monthly savings. Stay past it and points pay off.
Sellers and builders can often pay for points or buydowns, within limits set by your loan type.
Compare offers using the APR and the Loan Estimate, not the rate alone.
One discount point on a $250,000 loan costs $2,500. That is a lot of cash to hand over for a smaller number on a form. Sometimes it is a smart move, and sometimes it is money you never get back.
The answer depends on one simple question. How long will you keep this loan?
What a Discount Point Actually Is
A discount point is a fee you pay at closing to get a lower interest rate. One point equals 1 percent of the loan amount. On a $250,000 loan, that is $2,500.
The lower rate lasts as long as you keep the loan. That is the big difference from a temporary buydown, which we cover below.
How much a point lowers your rate changes with the lender and the day. Nobody can promise a set drop. Your loan officer will show you the exact trade on your Loan Estimate.
The Break-Even Math in Plain English
The break-even point is the month when your savings catch up to what you paid. You find it by dividing the cost by the monthly savings.
Here is an illustration, not a quote. Say one point costs $2,500 and trims your payment by $40 a month. Divide $2,500 by $40 and you get about 63 months. That is a little over five years.
If you keep the loan longer than that, the point pays you back. If you sell or refinance sooner, you lose money. The same math shows up in a refinance, and our guide to the break-even point walks through it.
Think about your plans honestly. A Dadeville family settling in near the schools may stay fifteen years. A buyer picking up a Lake Martin second home they may sell in three should be careful.
How a 2-1 Buydown Works
A 2-1 buydown is a temporary discount. In year one, your principal and interest payment is figured as if your rate were 2 percentage points lower. In year two, it is 1 point lower. From year three on, you pay the full note rate.
The note rate itself never changes. Someone deposits money at closing into a special account. Each month, that account covers the gap between your reduced payment and the full one.
Lenders still qualify you at the full payment. The buydown eases your early cash flow. It does not make an unaffordable loan work.
A 3-2-1 buydown adds a third year of savings and costs more. Buydowns also only reduce principal and interest. Taxes, insurance, and mortgage insurance stay the same.
If you pay off the loan early, leftover buydown money generally goes toward your balance. It usually does not come back to you as cash.
Points or Buydown: Which One Fits You
Points make sense when you plan to stay put. You pay more now and save a little every month for years.
A temporary buydown makes sense when you expect your income to grow or want breathing room after a move. Think of a new job that starts with a raise in two years.
Some buyers plan to refinance if rates fall. A temporary buydown can fit that plan, since you are not paying for a lower rate you may replace. A refinance has its own closing costs, though, so run the numbers first.
Who Can Pay for Them
You do not always have to pay yourself. Sellers, builders, and sometimes lenders can fund points and buydowns. Builders around Tallapoosa County sometimes offer them on new homes.
These gifts count as seller concessions, and each loan type caps them. FHA allows up to 6 percent of the sales price. Conventional caps run 3, 6, or 9 percent, depending on your down payment. VA and USDA have their own rules.
Concessions cannot cover your required down payment on an FHA loan. Ask your loan officer how much room you have before you write an offer.
Compare Offers Without Getting Fooled
A low rate can hide a high price. Always compare the APR too. The APR, or annual percentage rate, folds in many fees so you can see the true yearly cost.
Put two Loan Estimates side by side. Look at the points listed in Section A and the cash to close on page one. Then check what affects your rate so you know which pieces you can change. Points also add to your closing costs, so make sure your cash covers them.
FAQ
Are mortgage points tax deductible?
Sometimes. Rules depend on your situation, so ask a tax professional. Breeze Mortgage cannot give tax advice.
Can I pay for a fractional point?
Yes. Lenders often price in steps like one quarter of a point. Ask for several options on your Loan Estimate.
Does a 2-1 buydown change my loan term?
No. You still have the same 30-year or 15-year loan. Only your first two years of payments are lower.
Can a seller pay for my points in Alabama?
Often yes. Your loan type sets the limit on seller help. Your agent and loan officer can build it into the offer.
What if I refinance or sell before the break-even point?
You lose the part of the cost you have not earned back. That is why your timeline matters before buying points.
Do points help me qualify for a bigger loan?
A lower payment can improve your debt-to-income ratio. That is your monthly debts divided by your income. A temporary buydown generally does not, since lenders qualify you at the full payment.
Ready to see your options with real numbers? Reach out to Breeze Mortgage for a simple, stress-free look at what points or a buydown could do for you.
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Breeze Mortgage is powered by Edge Home Finance, LLC. NMLS #891464. Equal Housing Opportunity. This content is for informational purposes only and is not a commitment to lend. All loans are subject to credit approval, underwriting guidelines, and property eligibility requirements. Down payment assistance programs, availability, eligibility requirements, and funding are subject to change without notice. Contact Breeze Mortgage for current program details and to determine what options may be available for your specific situation.
