A significant portion of American homebuyers employ this tactic to reduce their monthly mortgage installments.

As homes become less affordable, an increasing number of buyers are employing a widely used tactic to reduce their mortgage rate.

Reducing the interest rate on a mortgage by paying extra to the lender at closing is known as buying points. This option results in smaller monthly payments and significant interest savings over the course of the loan.

Generally, by paying a fee equivalent to 1% of your loan amount, commonly referred to as a point, you can lower your interest rate by approximately 0.25%.

In 2023, 49% of homebuyers opted to pay off their mortgage rate, a significant increase from the 27% who did so in 2019, according to Zillow's latest data.

"Aaron Gordon, branch manager at Guild Mortgage, states that buying points is currently in high demand among borrowers as they attempt to secure rates near the historic lows of the pandemic. However, he emphasizes that this decision is a personal one, as what works for one borrower may not necessarily be the best option for another."

How to know if buying points is the right strategy for you

It is generally more advantageous for long-term homeowners to purchase points because it may take several years, typically between five to seven, to recoup the initial cost savings on monthly mortgage payments through buying points.

As long as you itemize deductions and the home is your primary residence, the cost of the points is tax deductible as prepaid mortgage interest.

For some buyers, it may be wiser to allocate additional funds towards the down payment rather than purchasing mortgage points. By doing so, they can reduce the total loan amount, which subsequently lowers their monthly payments. Moreover, putting down at least 20% of the purchase price can help buyers avoid private mortgage insurance (PMI), which can amount to more than $100 per month on a $300,000 loan, although the amount varies based on credit score and the size of the down payment.

Your monthly payments can be reduced by either making a larger down payment or purchasing points, but the specific loan terms will determine which option is more beneficial.

You might want to consider waiting out the market

If you plan to refinance before you reach the break-even point, the upfront cost of buying points to lower your interest rate might not be worth it because refinancing is expensive, typically costing between 2% and 6% of the loan amount, according to LendingTree estimates.

Securing a lower mortgage rate without paying extra out of pocket for twice could be achieved through refinancing or waiting out the market, as mortgage rates are predicted to drop from approximately 6.1% to 5.5% in 2025.

A temporary buydown reduces the mortgage rate by 1 to 3 percentage points for a limited time, typically cheaper than buying points for a permanent rate reduction, allowing for quicker break-even within two to three years.

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The 2-1 buydown is a common loan arrangement where the interest rate decreases by 2 percentage points in the first year, 1 point in the second, and then reverts to the full rate for the rest of the loan term.

"Robert Washington, a broker at Savvy Buyers Realty, states that he has observed several clients purchasing down their near-term rates using products such as 3-2-1 buydown programs. These clients have made this decision with the belief that they will refinance once rates drop to the 5% to 6% range."

It's advisable to consult with a mortgage broker before making any decisions regarding buying points, a temporary buydown, or putting more money toward a down payment, as rate buydown programs and loan terms differ and professional advice will help you make the most cost-effective decision.

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