Should you buy down your interest rate on a home loan?

Key takeaways

• Buying down a mortgage rate means paying an upfront fee commonly called discount points to lower your interest rate and monthly payment. 
• The strategy tends to make the most sense if you plan to keep the loan long enough to recoup the upfront cost through monthly savings. 
• Borrowers should weigh the cost of points against other financial priorities, including cash reserves, refinancing plans and long‑term goals. 

For borrowers willing to pay more at closing, buying down your interest rate can mean meaningfully lower monthly payments for the life of the loan. Some advantages of a buydown are that it can increase your purchasing power and reduce the total cost of borrowing over the life of the loan. However, borrowers should consider their long-term plans to determine whether the expense is worth the cost.

When you apply for a mortgage, you are offered an interest rate influenced by factors including market conditions, your credit score and the loan type. If you want to lower that rate, you can buy it down by paying a one-time fee at closing in exchange for a reduced interest rate.

“Buying an interest rate down is also known as paying discount points,” said Ralph DiBugnara, a mortgage banker and president of Home Qualified in New York City. “This is a way to get a lower interest rate upfront, and it gives the applicant a lower rate than the market rate or the rate they qualify for.”

When you buy down a mortgage rate, you are purchasing mortgage points, also referred to as discount points. Points are prepaid interest paid at closing to lower your interest rate for the life of the loan.

One point equal to 1% of the loan amount typically lowers the interest rate by about 0.25%.

“On a $500,000 loan amount, a 1%-point discount buydown will cost $5,000,” DiBugnara said. “If that reduced the interest rate from 6.75% to 6.5%, the principal and interest payment would fall from $3,242.99 to $3,160.34.”

That represents savings of roughly $83 per month, or about $992 per year and nearly $30,000 over the course of a 30‑year mortgage. With those terms, the upfront cost of purchasing a discount point would be recouped in a little more than five years.

Some mortgage lenders offer lender credits, which are funds provided by the lender to offset some closing costs. In exchange, borrowers typically accept a higher interest rate, which increases monthly payments.

By contrast, buying down a rate through discount points increases upfront costs but lowers the monthly payment.

Mortgage rates have made buying a home more challenging in recent years as rates have edged higher.

As of April 30, the average interest rate on a 30-year fixed rate mortgage was about 6.3%, according to Freddie Mac. Rates on a 15-year fixed-rate mortgages averaged about 5.64%, Freddie Mac said. Adjustable-rate mortgage rates are hovering around 6.3% depending on the loan structure and initial fixed period.

Combined with high home prices, today’s rates have priced some prospective buyers out of the market. As a result, many borrowers are looking for ways to reduce monthly payments.

A 3‑2‑1 buydown mortgage temporarily lowers the interest rate during the first three years of the loan. The rate is reduced by 3 percentage points in the first year, 2 points in the second year and 1 point in the third year. After the buydown period ends, the borrower pays the full rate for the remainder of the loan term.

This structure differs from a traditional rate buydown. A lender, homebuilder or seller typically pays for a 3‑2‑1 buydown to make a home more affordable to buyers.

There are both short‑ and long‑term advantages to buying down a mortgage rate. In the short term, a lower rate can increase purchasing power. Over the long term, it can reduce the amount paid in interest.

A reduced rate lowers monthly payments, which can make it easier to qualify for a mortgage. In some cases, a buydown may allow borrowers to qualify for a larger loan by reducing the monthly payment used in underwriting calculations.

However, a buydown does not guarantee a larger loan for every borrower. Other factors including income, credit score, down payment, reserves and loan program limits — still play a role. FDIC guidance notes that qualification depends on a borrower’s overall financial profile, not just the payment size.

A lower monthly payment can also provide more breathing room in a buyer’s budget, making it easier to manage other housing costs such as property taxes, insurance or maintenance in the early years of homeownership.

Over time, a lower interest rate means paying less interest.

“The long-term savings from a lower interest rate can be substantial,” said Carl Holman from Foundation Mortgage Corporation. “Even a small reduction, like 0.25%, can result in thousands of dollars in interest savings over the life of the loan.”

A lower rate can also accelerate equity growth.

“Lowering your interest rate means more of your monthly payment goes toward the principal balance,” said Rose Krieger, a home loan specialist at Churchill Mortgage. “That allows you to build equity more quickly.”

Buying down mortgage points tends to make the most sense when borrowers expect to remain in the home beyond the break-even point, when monthly savings exceed the upfront cost.

For borrowers who plan to sell or refinance before reaching that point, buying down points is less likely to deliver meaningful savings. Borrowers should also ensure they maintain adequate cash reserves before using savings to reduce a mortgage rate.

Another important consideration is the break-even point. This means how long it takes for monthly savings to equal the upfront cost of buying down the rate.

“The break-even point is when the amount you save on your monthly mortgage payments equals the upfront cost of buying down the rate,” Holman said.

For example, if buying down the rate costs $4,000 and saves $50 per month, the break-even point would occur about 80 months into the mortgage, or just over six and a half years.

Buying down a rate requires a substantial upfront investment, and borrowers should consider whether that money could be better used elsewhere.

“The funds used to buy points could instead be invested elsewhere, such as retirement savings or paying down higher interest debt,” Holman said.

In some cases, allocating those funds toward a larger down payment may deliver more benefit.

“Putting more money down may reduce the interest rate and could eliminate mortgage insurance,” Krieger said. “That can lower the overall monthly payment.”

Whether buying down a rate makes sense ultimately depends on the purchase price of the home, the rate you qualify for, the cash available for closing costs and how long you expect to own the home. While a lower rate can reduce monthly payments and long-term interest costs, the decision should be weighed against broader financial goals.

Mortgage points are generally treated as prepaid interest and may be tax‑deductible under certain conditions, according to the Internal Revenue Service (IRS).

Under IRS guidance, points paid to buy or build a primary residence may be deducted in the year they are paid if specific requirements are met, including that the charges are customary in the local market and clearly listed as points on the closing statement. Points paid as part of a refinance are typically deducted over the life of the loan rather than all at once.

The IRS also generally treats seller paid points as paid by the buyer for tax purposes, though the cost must be subtracted from the home’s purchase price when calculating the buyer’s tax basis. Borrowers who itemize deductions should consult a tax professional to determine how mortgage points apply to their individual situation.

This story was updated on May 4.