United States
Hong KongDiscount points and buydowns
One discount point is one percent of the loan amount and reduces the interest rate.
- Break-even is the point cost divided by the monthly saving.
- Origination points are a fee for making the loan and buy nothing.
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Simple arithmetic and one important distinction.
What a point is
One percent of the loan amount. On a 300,000 dollar loan, one point is 3,000 dollars.
A discount point is paid to reduce the interest rate. How much reduction a point buys varies with the market and is not fixed.
Discount against origination
A discount point buys a lower rate. An origination point is a fee for making the loan and buys nothing.
Both are quoted as points and both are one percent of the loan amount. Only one changes the rate, and questions rely on candidates conflating them.
The qualified mortgage cap of 3 percent on loans of 100,000 dollars or more counts points and fees together. A loan loaded with both can breach it.
The break-even calculation
Divide the cost of the points by the monthly saving they produce. The answer is the number of months before the borrower is ahead.
Pay 3,000 dollars to save 60 dollars a month and the break-even is 50 months. A borrower planning to move in three years should not pay those points.
Temporary buydowns
A temporary buydown uses funds set aside to subsidize the borrower's scheduled payments for a limited period. After that period, the borrower pays the note payment without the subsidy. For many conventional temporary buydowns, the note rate itself does not change; the contribution makes the early payments smaller. Check the actual note and buydown agreement.
A 2-1 structure commonly means the payment is calculated using a rate two percentage points below the note rate in year one, one point below in year two, and the full note rate from year three. These are payment-subsidy stages, not three permanent changes to the contractual note rate.
Temporary subsidy versus permanent rate reduction
| Feature | Temporary buydown | Permanent discount points |
|---|---|---|
| What changes | A funded subsidy lowers the borrower's scheduled payment for a stated introductory period | The negotiated note rate is lower for the loan term |
| After the introductory period | The subsidy ends and the borrower pays the note payment | The reduced contractual rate continues unless the loan is modified or paid off |
| Who may fund the cost | Borrower, lender, seller, builder, or another permitted source, subject to loan-program rules | Borrower or another permitted source, subject to pricing and contribution rules |
| Underwriting example | Fannie Mae requires qualification at the note rate without relying on the bought-down payment | Qualification uses the contractual payment and applicable underwriting rules |
For illustration, a temporary 2-1 buydown on a mortgage with a 6.5% note rate may subsidize the payment calculated at 4.5% in year one, 5.5% in year two, and 6.5% thereafter. The borrower remains responsible for the note obligation under the contract; the subsidy account covers the agreed early payment difference. Fannie Mae's guide requires qualifying the borrower at the note rate, without using the temporary lower payment to meet the qualification test. Exact availability and terms depend on the investor and loan program.
A permanent point purchase works differently: points paid at closing reduce the contractual rate according to the lender's current pricing. Compare the upfront cost with expected monthly savings and the time the borrower expects to keep the loan. For a temporary subsidy, compare the subsidy schedule and funding source with the payment after the subsidy expires. Neither structure is automatically the better offer.
Who pays
Points may be paid by the borrower, the seller or the lender depending on the transaction, and seller-paid points are subject to contribution limits by program.
Common questions
What is a discount point?
One percent of the loan amount, paid to reduce the interest rate.
What is the difference between discount and origination points?
Discount points buy a lower rate. Origination points are a fee for making the loan and buy nothing.
How do you calculate the break-even on points?
Divide the cost of the points by the monthly saving. The result is the number of months to break even.
What is a 2-1 buydown?
A temporary buydown reducing the rate by two percentage points in year one and one in year two, before it reaches the note rate.
Does a temporary buydown permanently lower the mortgage note rate?
Generally, a temporary buydown subsidizes payments for a limited period while the borrower remains obligated under the note. The lender should qualify the borrower using the note rate when required by the applicable loan program. Check the note and buydown agreement.
Do points count towards the qualified mortgage cap?
Yes. Points and fees together are capped at 3 percent on loans of 100,000 dollars or more.