Buying Down The Rate

Everyone wants the lowest interest rate possible on their mortgage, but does a lower rate always mean more savings? It’s one of the most common questions homebuyers ask, and the truth is that a low rate isn’t always the best financial move. Whether it makes sense depends on your goals, how long you plan to keep the loan, and what you’re giving up to get that lower rate.

When you pay money upfront to reduce your rate, you’re buying what’s called discount points. One discount point costs 1% of your loan amount, but that doesn’t mean your rate drops by 1%. Typically, each point lowers your rate by about 0.25%, depending on the lender, loan program, and market conditions. For example, on a $400,000 loan, one point would cost $4,000 and might reduce your rate from 6.5% to 6.25%.

Paying points can make sense because it gives you a lower monthly payment and can even help you qualify for a slightly larger loan amount. However, it’s important to look beyond the short-term benefit and calculate your break-even point — the time it takes for your monthly savings to add up to what you paid upfront.

Let’s say you spend $8,000 to buy down your rate and it saves you $40 a month. In that case, it would take about 200 months — a little over 16 years — to break even. If you plan to sell or refinance before that point, it’s not a good investment. You’d likely be better off keeping the $8,000 or using it toward other goals, such as paying down higher-interest debt, building your emergency fund, or investing elsewhere.

On the other hand, if you plan to keep the home long-term, buying down your rate can lead to significant savings over time. The longer you hold the loan, the more the upfront cost pays off. For example, if you stay in the home for 20 or 30 years, the savings from a lower rate can easily exceed what you spent to get it.

In short, buying down your mortgage rate can be a smart move — but only when it aligns with your long-term plans. Always ask your loan officer to show you a break-even analysis so you can see the exact numbers for your situation. A lower rate sounds appealing, but the best financial decision is the one that saves you the most money over time, not just today.