When evaluating today’s mortgage landscape with rates hovering around 6%, many homebuyers wonder whether paying extra money upfront to secure a lower interest rate makes financial sense. This strategy—known as “buying down the rate” through discount points—can significantly reduce your monthly payments, but it comes with substantial upfront costs and important timing considerations that every borrower should understand before committing.
Understanding Discount Points: A Complete Guide for 2026 Homebuyers
This comprehensive guide explains exactly how much it costs to buy down your mortgage rate, examines the pros and cons of this strategy, and helps you determine whether discount points align with your financial goals in 2026.
What Are Mortgage Discount Points?
Mortgage discount points, commonly called “points,” are prepaid interest you pay to your bank or mortgage lender at closing in exchange for a reduced interest rate throughout your loan term.
Think of points as buying a discount on your future interest costs by paying more money upfront.
The fundamental structure:
- One point equals 1% of your loan amount — On a $300,000 mortgage, one point costs $3,000
- Each point typically reduces your rate by 0.25% — Though this varies by lender and market conditions (U.S. Bank, 2025)
- You can purchase fractional points — Many lenders allow you to buy 0.5 or 0.75 points
For example, if you’re quoted a 6.5% rate on a $400,000 mortgage and purchase two points ($8,000), your rate might drop to 6.0%, reducing your monthly principal and interest payment from $2,528 to $2,398—a savings of $130 per month (NerdWallet, 2026).
The Real Cost of Buying Down Your Mortgage Rate
Standard Pricing Structure
The cost of buying down your mortgage rate scales directly with your loan amount:
| Loan Amount | 1 Point Cost | 2 Points Cost | 3 Points Cost |
|---|---|---|---|
| $200,000 | $2,000 | $4,000 | $6,000 |
| $300,000 | $3,000 | $6,000 | $9,000 |
| $400,000 | $4,000 | $8,000 | $12,000 |
| $500,000 | $5,000 | $10,000 | $15,000 |
To lower a $400,000 mortgage by a full 1% (four points), you might pay between $12,000 and $16,000 at closing, depending on your lender’s pricing structure and current market conditions (GO Mortgage, 2025).
Variable Pricing Based on Market Conditions
The rate reduction you receive per point isn’t fixed—it varies based on several factors:
- Current interest rate environment — When rates are higher, each point typically provides greater rate reduction
- Loan type — Adjustable-rate mortgages (ARMs) often see 0.375% reduction per point versus 0.25% for fixed-rate mortgages (Casaplorer, 2026)
- Loan characteristics — Higher down payments and stronger credit scores may yield better point-to-rate conversion ratios
- Lender pricing — Each institution sets its own point pricing, making shopping around essential
Understanding the Break-Even Point
The critical question when considering discount points isn’t just the cost—it’s whether you’ll stay in the home long enough to recoup your investment through monthly savings. This calculation is called the break-even point.
How to Calculate Your Break-Even Point
Break-Even Formula: Cost of Points ÷ Monthly Savings = Break-Even Period (in months)
Real-world example:
Scenario: $300,000 mortgage, 30-year fixed
Without points: 7.0% rate = $1,996 monthly payment
With one point ($3,000): 6.75% rate = $1,946 monthly payment
Monthly savings: $50
Break-even calculation: $3,000 ÷ $50 = 60 months (5 years)
Conclusion: You must keep the mortgage for at least 5 years before the point purchase becomes profitable (NerdWallet, 2026).
According to mortgage industry data, most homeowners refinance or move within 5 to 7 years, making break-even periods longer than 5 years particularly risky (Mortgage Calculator, 2026).
The Pros of Buying Down Your Mortgage Rate
1. Significant Long-Term Interest Savings
Over a 30-year mortgage, even a 0.25% rate reduction generates substantial savings. On a $400,000 loan, reducing your rate from 6.5% to 6.25% saves approximately $18,000 in total interest over the full loan term (PrimeLending, 2026).
2. Lower Monthly Payments
Reduced interest rates directly translate to smaller monthly principal and interest payments, freeing up cash flow for other financial priorities like retirement savings, emergency funds, or additional mortgage principal payments.
3. Increased Buying Power
Lower monthly payments may help you qualify for a larger loan amount by improving your debt-to-income ratio—potentially allowing you to purchase a more expensive home while staying within your budget.
4. Tax Deductibility
Discount points are tax-deductible as prepaid interest in the year you pay them, provided you meet IRS requirements: your main home secures the loan, paying points is standard practice in your area, and the points paid don’t exceed amounts generally charged locally.
5. Predictable Savings
Unlike market-dependent investments, the savings from discount points are guaranteed for the life of your fixed-rate loan, providing certainty in your housing costs.
The Cons of Buying Down Your Mortgage Rate
1. Substantial Upfront Costs
Buying points requires significant cash at closing—money that could alternatively be used for a larger down payment, home improvements, emergency funds, or investments with potentially higher returns.
2. Long Break-Even Periods
With typical break-even periods of 4-6 years, you’re betting on staying in the home and not refinancing for an extended period. If you sell or refinance before reaching the break-even point, you’ve paid the full cost of points without obtaining most of their benefits .
3. Opportunity Cost
The money spent on points could earn returns elsewhere. If you invest $3,000 in an index fund averaging 8% annual returns instead of buying points for a 0.25% rate reduction, the investment may generate superior long-term wealth accumulation.
4. Less Effective with Lower Down Payments
If you’re putting down 5-10%, using that cash toward a larger down payment (reaching 20% to eliminate private mortgage insurance) typically provides better financial benefits than buying points.
5. Refinance Risk
If mortgage rates decline significantly in the next few years—a possibility many economists predict for late 2026 and 2027—you’ll likely refinance to capture lower rates, rendering your point purchase largely worthless as you abandon the reduced-rate loan.
When Buying Down Your Rate Makes Sense
Discount points are most beneficial when you meet all of these criteria:
✓ You Should Buy Points If:
- You plan to stay in the home for 7+ years — Well beyond the typical break-even point
- You have substantial cash reserves — After making your down payment and maintaining 6 months of emergency funds
- You believe rates won’t drop significantly — Making refinancing unlikely in the near term
- You want to maximize monthly cash flow — Lower payments help with tight budgets
- You’re in a high tax bracket — Maximizing the tax deduction benefit
When You Should Skip Discount Points
✗ Avoid Buying Points If:
- You might move or refinance within 5 years — You won’t reach the break-even point
- You’re stretching to afford the down payment — Those funds are better applied to reducing your loan amount
- You expect rates to decrease — Refinancing would negate your point purchase
- You prefer investment liquidity — Money in investments is accessible; money in points is not
- You’re buying an ARM — You’ll likely refinance when the fixed period ends
Alternative Strategies to Consider
Before committing to discount points, explore these alternatives:
1. Larger Down Payment
Increasing your down payment reduces your loan amount, eliminating the need for private mortgage insurance at 20% down and reducing lifetime interest costs without the break-even risk of points.
2. Seller-Paid Points
In slower markets or new construction deals, negotiate for the seller or builder to pay for discount points as a purchase incentive. This gives you the rate reduction without depleting your cash reserves.
3. Temporary Buydowns
Instead of permanent rate reductions, temporary buydowns (like 2-1 or 3-2-1 structures) reduce your rate for the first few years, then revert to the standard rate—useful if you expect income increases or plan to refinance.
4. Shopping for Better Rates
Different lenders offer varying base rates. The rate difference between lenders often exceeds what you’d gain from buying points, making thorough shopping more cost-effective than paying for points with a high-rate lender.
Do the Math for Your Situation
Buying down your mortgage rate through discount points costs 1% of your loan amount per point, with each point typically reducing your rate by 0.25%. While this strategy can save tens of thousands in interest over a 30-year loan, the upfront costs range from $2,000 to $15,000+ depending on your loan size, and you must stay in the home beyond your break-even point—typically 4-6 years—to benefit financially.
In 2026’s evolving rate environment, with many economists predicting gradual rate declines through 2027, the traditional wisdom of buying points becomes less compelling. The risk that refinancing opportunities will emerge within the next few years makes committing substantial cash to permanent rate buydowns particularly risky.
Our recommendation: Focus first on maximizing your down payment and maintaining adequate cash reserves. Only consider discount points if you have substantial excess cash, absolute certainty about staying in the home for 7+ years, and skepticism about significant rate decreases that would trigger refinancing.
Always use your lender’s Loan Estimate form to compare total costs and break-even timelines before making your final decision. The right choice depends entirely on your specific financial situation, timeline, and risk tolerance.
References
NerdWallet. (2026). Mortgage points calculator: Rate buy down calculator. https://www.nerdwallet.com/mortgages/calculators/should-i-buy-points
PrimeLending. (2026). Discount points: Discount point calculator. https://www.primelending.com/calculators/discount-points-calculator
About RefiGuide
Bryan Dornan is a financial journalist and currently serves as Chief Editor of RefiGuide.org. Bryan has founded several mortgage and marketing companies and has worked as a loan officer and mortgage broker in the industry for nearly 30 years and has a wealth of experience in providing mortgage clients with the highest level of service in the industry. Bryan's continual focus is to educate homeowners how to leverage home equity while also promoting affordable home-ownership to consumers like you across the United States. He also writes for RealtyTimes, Patch, Buzzfeed, Medium and other national publications. Find him on Twitter, Muckrack, and Linkedin
More articles by RefiGuide