Should You Buy Down Your Mortgage Interest Rate? | Pros and Cons

Is it worth buying down your rate?

When interest rates are high, some borrowers may choose to buy down their interest rate to lower monthly payments and make their mortgage more affordable.

Buying down the interest rate means paying an extra upfront fee to get a lower rate and monthly payment. This is referred to as buying "mortgage points" or "discount points."

When interest rates are low, few borrowers pay higher closing costs to get a discount. But as mortgage rates rise, borrowers are more likely to weigh the pros and cons of buying points. Here's what you should know.

In this article (Skip to...)

• Should you buy down your rate?
• Pros of buying down interest rate
• Cons of buying down interest rate
• How mortgage buydowns work
• How much can you save
• Types of buydowns
• Buying down interest rate
• FAQ

Should you buy down your interest rate? Pros and cons

Considering whether to buy down your mortgage interest rate is a big decision for borrowers, as it requires weighing the upfront expenses against potential long-term benefits. Below are the pros and cons of investing in mortgage points:

Pros of buying down your interest rate

The biggest reason to buy down your interest rate is to get a lower rate on your mortgage loan, regardless of credit score. Lower rates can save you money on both your monthly payments and total interest payments over the life of the loan.

In addition:

• If your income is too low for you to qualify for the house you want, you may be able to afford the purchase price with a reduced interest rate and payment
• If you can convince a home seller to pay discount points for you, buying down your interest rate may help you qualify for your mortgage loan
• Since discount points represent prepaid mortgage interest, the cost is often tax-deductible (provided that you itemize your deductions). Ask a tax professional for more information

First-time home buyers who anticipate staying in their homes for a long time often choose to buy down their interest rate. That’s because the early years of homeownership can be more expensive, and first-time home buyers' incomes may be lower. A better rate can drop your monthly payments and even help you qualify for a more expensive home.

Cons of buying down your interest rate

The primary drawback when you buy down your mortgage interest rate is that it increases the upfront cost of buying a home.

Your monthly payments will be lower, but you need to "break even" for those saving to be worth it. That means you should plan to keep the home loan long enough that your total savings outweigh the upfront cost of buying points.

Buying mortgage points also ties up your liquid cash. You may have better uses for that money; for example, paying off high-interest credit card debt, making investments, or saving for future home improvements. You may also want to use the cash to invest in assets other than real estate for diversification, to boost a college tuition fund, or to pad your retirement account.

Finally, if you’re making a down payment of less than 20% — or have less than 20% in home equity when refinancing — you'll probably have to pay for private mortgage insurance (PMI) on a conventional loan. Thus, it could be best to use your cash for a larger down payment rather than buying points. 

How does a mortgage buydown work?

Buying down your mortgage interest rate involves purchasing discount points (also known as "mortgage points"). You'll pay an upfront fee to the lender at closing in exchange for a lower rate over the life of the loan. Most types of mortgage loans allow buyers to purchase discount points, including conventional, FHA, VA, and USDA loans.

The rate reduction per point depends on the mortgage lender and the type of loan. However, as a rule of thumb, a mortgage point costs 1% of your loan amount and lowers your rate by about 0.25%.

Let's look at an example, using a $400,000 mortgage amount:

• Original quote: $400,000 mortgage at 6.25%
• One discount point costs $4,000
• One point lowers the rate by 0.25% (from 6.25% to 6.00%)
• Over 30 years at 6.25%, you’d pay $486,600 in total interest
• Over 30 years at 6%, you’d pay only $463,300 in total interest
• Extra upfront cost of buying points: $4,000
• Savings from buying points: $23,300

The actual savings and interest rate reduction will vary depending on your loan and lender. Ask your loan officer to show you a few different quotes, with and without points, so you can understand how the potential cost and savings stack up.

How much can you save with a mortgage buydown?

Whether you should buy down your interest rate depends on the break-even point and the savings that come with it. Your break-even point is the number of years, months, or mortgage payments it will take before buying mortgage points is worth it.

For example, if you pay several thousand dollars to buy down your interest rate, but you sell or refinance your home before your specific break-even point, then you will see no savings from a lower rate.

Suppose it costs two points ($8,000) to reduce the interest rate on a $400,000 fixed-rate loan with a 30-year term from 4.5% to 4.0%. Your monthly mortgage payment for principal and interest would drop by $117 with the lower rate ($1,910 instead of $2,027).

• After five years at 4.0%, you'll have paid $76,370 in interest payments, plus $8,000 in mortgage points, for a total of $84,370. You'll have reduced your principal balance by $38,210
• With the 4.5% loan, you'll have paid $86,236 in interest. You'll have reduced your principal balance by just $35,368 

In this case, then, it will cost you $1,888 less over five years if you pay the discount points. But that's not all. You'll have reduced your balance by an extra $2,842. So your total savings in five years is $4,730. Moreover, buying points will have saved you $10,000 in interest payments.

 You can figure out your potential savings and break-even point by using a mortgage calculator. 

Types of mortgage rate buydowns

Did you know that mortgage rate buydowns come in a variety of options? Here's a summary of what you might find when you start shopping around for a mortgage rate reduction:

• Permanent buydown: This buydown results in the interest rate being lowered by a certain percentage for the entire duration of the mortgage.
• Temporary buydown: This buydowns typically results in a temporary reduction in the interest rate for a specified period, often the first few years of the mortgage term.
• 3-2-1 buydown: This option involves a more gradual reduction in the interest rate over the initial three years of the loan, with each year representing a different interest rate tier (e.g., 3% lower in the first year, 2% in the second, and 1% in the third).
• Seller contributions: In some cases, sellers may offer to contribute to the buyer's closing costs, which can be used to fund a buydown.

How to shop for loans with mortgage discount points

When you're shopping for a mortgage loan, it's important to get multiple rate quotes and compare them on equal footing. Your quotes should include the same amount of points so you know which lender is truly offering the cheapest rate-and-fee combination.

Here’s an example. Say one national lender offers a 30-year fixed-rate mortgage at 6.5% with no points. You can knock 0.25% off that and get 6.25% by paying half a discount point. But a 6.125% rate (just 0.125% lower) costs an additional point. Paying more doesn't necessarily get you a better deal.

When shopping for a mortgage with discount points, the easiest way to compare offers is to decide how much you want to spend, then see who offers the lowest rate at that price. Alternatively, you can decide what mortgage interest rate you want, and see which lender charges the least for it.

Interest rate buydown FAQ

What are today's interest rates?

Mortgage rates have recently fallen from their 2023 peaks. However, they're still much higher than a few years back so paying discount points can help you save. To see what you qualify for, get preapproved by a mortgage lender. Ask your loan officer to show you rate quotes both with and without mortgage points so you know how much you could save on your rate — and what it would cost you.