Every mortgage quote is really a menu: pay more upfront for a lower rate, or take a higher rate and pay less at closing. Mortgage points explained simply — that is the trade. This guide is educational only and covers discount points, temporary buydowns, lender credits, and the break-even math.
What a discount point is
One discount point conventionally costs 1% of the loan amount and buys a reduction in the interest rate. The reduction per point is not fixed — it moves with market pricing and varies by loan type, term, and credit profile, so one point buys different amounts of rate at different companies.
Do not confuse a discount point with an origination point, which is a fee for making the loan and buys no rate reduction.
Permanent points vs. temporary buydowns
A discount point is permanent — it lowers the note rate for the life of the loan.
A temporary buydown is different. A lump sum sits in an escrowed account and subsidises the payment for the first year or two, then the payment steps up to the full note rate. The common 2-1 structure cuts the effective rate by two percentage points in year one and one point in year two.
Two things matter. You must generally qualify at the full note rate, not the reduced starting rate. And temporary buydowns are frequently paid by a seller or builder as a concession rather than by the buyer.
Lender credits as the reverse trade
Run the trade backwards and you get a lender credit: you accept a higher rate and the company credits money toward closing costs. Nothing is free — you pay through interest over time instead of cash at the table.
Credits often fit when cash is tight or you expect to move within a few years; points often fit when you are confident you will hold the loan a long time. For where credits land in the wider bill, see what mortgage closing costs include and who pays them.
Working out the break-even period
The arithmetic is straightforward: divide the upfront cost of the points by the monthly payment savings the lower rate produces. The result is the number of months to break even.
If points cost 3,000 dollars and save 60 dollars a month, break-even lands at about 50 months. Stay past that and the points paid off; sell or refinance sooner and they did not.
Two refinements. The deductibility of points depends on your circumstances, so consult a tax professional. And be honest about how long you will keep the loan — most people keep mortgages for less time than they expect.
Comparing quotes when points differ
This is where borrowers get misled: a strikingly low rate may simply have points buried in it.
- Ask every company for a quote at zero points, then at a set point cost, so you compare like with like.
- Read the Loan Estimate, where discount points and lender credits are itemised.
- Check whether a rate lock covers your expected timeline; see how mortgage rate locks work and when to lock.
- The rate itself moves with the market — how mortgage rates are set explains what is under the quote.
Compare advertised offers
Point pricing varies by company and by day. Browse finance companies and compare advertised offers, then request Loan Estimates on the same scenario so the point structures line up.
Frequently asked questions
Is it worth buying down your mortgage rate?
It depends on how long you keep the loan. Divide the upfront cost by the monthly savings to find your break-even in months. If you expect to stay well past that point, buying down may pay off; if you might sell or refinance sooner, it usually does not.
How much does one mortgage point cost?
One point conventionally costs 1% of the loan amount, paid at closing. How much rate it buys is not fixed — it depends on market pricing that day, the loan program, and your profile. Ask each company what one point actually reduces the rate by.
What is a 2-1 buydown?
It is a temporary buydown where escrowed funds reduce your payment as if the rate were two percentage points lower in year one and one point lower in year two, before reaching the full note rate. Sellers or builders often fund it as a concession.
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