When purchasing a home, every fraction of a percentage on your interest rate matters. One way to save money over the life of your loan is by buying down your rate—often called paying for “points.” Here’s what that means and how it works.
What Does “Buying Down Your Rate” Mean?
A mortgage “buydown” lets you pay upfront fees to lower your interest rate. Each “point” typically costs 1% of your loan amount and reduces your rate by about 0.25% (though exact amounts vary).
For example:
- Loan: $300,000
- 1 point = $3,000
- Rate drops from 6.5% to 6.25%
That small change can add up to significant savings over the life of the loan.
When Does It Make Sense?
Buying down your rate can be a smart move if:
- You plan to stay in the home long enough to recoup the upfront cost.
- You want to lower monthly payments for long-term affordability.
- You have extra cash available at closing.
If you plan to sell or refinance in just a few years, paying points may not be worth it.
Temporary vs. Permanent Buydowns
- Permanent buydown: You pay points once, and the lower rate lasts for the life of the loan.
- Temporary buydown: Commonly called a “2-1 buydown,” the rate starts lower (e.g., 2% less the first year, 1% less the second) and then adjusts to the full rate. Sometimes sellers or builders offer this as an incentive.
Key Takeaway
Buying down your interest rate can reduce your monthly mortgage payment and save thousands over time. But the right choice depends on your budget, how long you’ll stay in the home, and your financial goals.
💡 Pro tip: Always ask your lender to show you the “break-even point”—how long it takes for the upfront cost to pay for itself in monthly savings.
