Points / Buydown (USA)
Analyze points, credits, break-even, and temporary buydown effect.
📖 Permanent points vs temporary buydowns
Discount points are prepaid interest. You pay roughly 1% of the loan amount upfront to lower the note rate by a fraction — commonly 0.125% to 0.25% per point. The rate reduction applies for the life of the loan.
Temporary buydowns (like 2-1 or 1-0) reduce the rate only for the first 1-2 years, then the full rate kicks in. These are often seller- or builder-funded to help buyers qualify in high-rate environments.
Permanent points
Upfront fee, lifetime-of-loan rate reduction. Best when holding period is long.
2-1 buydown
Rate is 2% below note in year 1, 1% below in year 2, full rate from year 3 on.
Lender credit
Opposite of points — lender pays some closing costs in exchange for a slightly higher rate.
⚖️ The break-even calculation
Break-even = upfront point cost ÷ monthly payment savings. If you stay in the loan past break-even, points were worth it. If you refinance or sell before break-even, the upfront cost was wasted.
Example: paying 1 point ($4,000 on a $400k loan) to lower rate from 6.50% to 6.25% saves about $66/month. Break-even ≈ 61 months (5 years). Plan to stay less than 5 years and points are a net loss.
Most borrowers move or refinance within 5-7 years, which is why paying multiple points is rarely the winning play in practice.
💡 When does each strategy actually win?
Permanent points
Worth it only when holding period clearly exceeds break-even — forever home, long-term rental, or rate environment where refinance looks unlikely.
Temporary buydown (seller-paid)
Often worth accepting if the seller is funding it — no cost to you, lower payments for 1-2 years while you settle in.
Temporary buydown (borrower-paid)
Rarely wins on math alone. Makes sense if you expect income to grow or rates to drop before the buydown expires.
Lender credits
Useful if cash-to-close is the binding constraint — accept a slightly higher rate in exchange for preserved cash reserves.
❓ Frequently asked questions
Are discount points tax-deductible?
On a primary residence purchase, points are often deductible in the year paid if you itemize. On a refinance, points typically must be deducted pro-rata over the loan life. Verify with current IRS guidance.
Can I combine points with a temporary buydown?
Yes, but it gets complex. The calculator supports modeling both at once — start simple (one or the other) before layering them.
What if I refinance before the 2-1 buydown ends?
Unused buydown funds are usually refunded to whoever paid them. If the buyer funded it, the remaining balance often offsets refinance costs.