Temporary Buydown vs. Discount Points

Temporary buydowns and permanent rate reductions through discount points should be evaluated separately.

Temporary Buydown

A temporary buydown subsidizes the payment for a limited period. The underlying note rate usually remains unchanged.

Discount Points

Discount points are upfront costs paid in exchange for obtaining a lower mortgage interest rate. One point is generally equal to 1% of the loan amount, but one point does not guarantee a specific reduction in rate.

Use Break-Even Analysis

If a lower rate costs $4,000 and saves $80 per month, a simple break-even calculation is $4,000 divided by $80, or 50 months. The borrower should consider how long the mortgage is likely to be retained.