When you are quoted a rate, you are often also offered the chance to pay more upfront for a lower one. Two distinct tools do this — discount points and temporary buydowns — and they are easy to confuse. Understanding the difference, and the break-even math, keeps you from overpaying for a rate reduction you will not hold long enough to recoup. All figures here are illustrative and subject to change; this is not a commitment to lend.
Discount points: a permanent reduction
A discount point is an upfront fee, expressed as a percentage of the loan amount, paid to permanently lower your interest rate for the life of the loan. The reduction per point varies with market conditions, but the structure is always the same: pay more at closing, pay less every month forever after.
The decision hinges on break-even. Divide the upfront cost of the points by the monthly payment savings, and you get the number of months it takes to recoup the cost. Stay in the loan past that break-even and the points pay off; sell or refinance before it and you have lost money. Since the median mortgage does not last its full term, the break-even horizon matters more than people assume.
Temporary buydowns: a few years of relief
A temporary buydown is a different animal. Structures like a 2-1 or 3-2-1 buydown lower your rate by a set amount in the first year or two, then step it up to the full note rate. A 2-1 buydown, for example, reduces the rate meaningfully in year one, less in year two, and lands at the full rate from year three onward.
The money to fund the buydown is placed in an account at closing and used to subsidize the early payments. Crucially, the funding often comes from the seller or builder as a concession rather than from the buyer — which is what makes buydowns attractive in markets where sellers are offering incentives.
Who each fits
- · **Points** suit a buyer confident they will hold the loan well past the break-even point.
- · **Temporary buydowns** suit a buyer who expects rising income, or who can get a seller to fund the buydown, and who values lower payments in the early years.
- · Neither makes sense if you expect to refinance or move soon, since you would not capture the benefit.
The Alliance take
We run the break-even before recommending points, and we look hard at whether a seller concession could fund a buydown instead of your cash. Paying for a lower rate only makes sense if the math says you will keep the loan long enough to get your money back.
Weighing whether to buy down your rate? Reach out and we will run the break-even for your scenario.