Should you buy down your rate? A break-even framework

When a lender shows you a beautiful low rate, look at Section A of your Loan Estimate. Very often, that rate comes with points. You're paying cash today for a lower rate over time.

That can be a smart trade. The question is whether you'll keep the loan long enough for it to pay off.

What a point actually is

One discount point costs 1% of your loan amount. On a $400,000 loan, one point is $4,000.

How much a point lowers your rate varies by lender and by day. A common range is 0.125% to 0.25% per point. It's not a fixed exchange rate, and that's exactly why you should always run the numbers.

A real example

The question behind the question

The math is easy. The hard part is predicting how long you'll keep the loan. Two things end a loan early:

• Moving. Job changes, growing families, life. Be honest with yourself about your timeline.
• Refinancing. If rates drop meaningfully in the next few years, you might refinance. Then the points you paid are gone.

Paying points is a bet that rates won't fall much and you won't move soon. Sometimes that's a good bet. You should know you're making it.

My rules of thumb

1. If the break-even is more than 5 years, I usually lean against points.
2. If you're certain you'll stay 10+ years and rates feel low, points can make sense.
3. If paying points drains your cash reserves, don't. Cash in the bank is worth more than a slightly lower rate.
4. If the seller is offering credits, points can be a great use of the seller's money instead of yours.

Other ways to lower the payment

Temporary buydowns (2-1, 1-0)

A 2-1 buydown lowers your rate by 2% in year one and 1% in year two, then it goes to the full note rate. These are usually paid by the seller or builder. They help with early cash flow, but you still need to qualify at the full rate and be ready for the payment to rise.

Lender credits: the reverse

You can also take a slightly higher rate in exchange for a credit toward closing costs. If you expect to refinance or move within a few years, this is often the smarter move.

How to spot points on a quote

On page 2 of your Loan Estimate, Section A lists origination charges. Look for a line that says something like "0.875% of loan amount (points)." If two lenders quote you different rates, compare them with the points included. Otherwise you're comparing apples to oranges.

If you'd like a second pair of eyes, send me your Loan Estimate and I'll tell you whether the points on it are a good deal.

Figures in this article are illustrative examples, not rate quotes. Your actual rate, mortgage insurance and costs depend on your credit, down payment, property and loan program. This is not a commitment to lend. All loans subject to credit approval and underwriting guidelines. Rates and terms are subject to change without notice.