Should you pay extra upfront to get a lower mortgage rate? It's a common question many physicians ask themselves when in the market for buying a house. Mortgage points became much more relevant again after interest rates rose sharply in the 2020s. Lenders often present buying down the rate as an obvious win, but the reality is that it's not always that simple. The decision is a tradeoff between lower monthly payments now or keeping that cash available for investing or other goals.

For physicians and other high-income professionals, the math can be even more significant, because they often face larger mortgage balances. In this article, we will look at what it means to buy down your interest rate, when it makes sense, and when it may be better to save the cash for other purposes.

What Does ‘Buying Down the Rate' Mean?

You might think of “mortgage interest rates” as a single number, but the truth is that there's more that goes into your interest rate behind the scenes. One way to get a lower mortgage rate is by paying points to the lender. Buying mortgage discount points is a way to pay money upfront to reduce the interest rate on your mortgage, and it's often referred to as “buying down” your rate.

While the exact terms can vary by lender, a typical scenario is that buying one point is equivalent to an upfront cost of 1% of the mortgage loan. So, on a $300,000 mortgage, paying one point would cost $3,000. Again, the terms can vary, but the typical interest rate reduction is 0.25% per point purchased. Two other things to keep in mind are that it is often possible to buy quarter or half points, and paying points is completely separate from any lender or origination fees.

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The Math Behind Mortgage Points

Buying points upfront is essentially prepaid interest, since you're paying money now to save interest down the road. You can buy down your rate with a temporary interest rate reduction (such as the 2-1 buydown where your interest rate is 2% lower in Year 1 and 1% lower in Year 2 before returning to the full note rate in Year 3). But most of the time when you buy down your mortgage interest rate, you are reducing your rate for the entire life of the mortgage.

A simple way to think about whether buying down your rate is a good idea is to calculate the breakeven point. Here's an example:

  • $500,000 mortgage
  • Initial interest rate of 6.5%
  • Buying one point (1% of your mortgage or $5,000) reduces your rate by 0.25%, to 6.25%

In this scenario, your monthly principal and interest amount is $3,160 with no points purchased. If instead you buy one point to drop your rate to 6.25%, your monthly payment before taxes and insurance drops to $3,078.

Since you paid $5,000 upfront to save $82 per month, one way to calculate the breakeven point is to divide $5,000 by $82. That gives a breakeven point of 61 months. If you think that you will stay in the home for longer than 61 months (AND won't refinance during that timeframe either), it can make sense to pay points upfront. If that's not the case, it's better to pay a higher interest rate. This is a slight simplification, since $5,000 paid today is worth more than $5,000 saved over the next five years, but it can be a useful back-of-the-envelope calculation to see if buying down your rate might make sense.

When Buying Down Your Rate Makes Sense

Long-term home ownership plans favor buying points, but that's not the only thing to keep in mind. Even if you have found your forever home, the relative position of your current rate in terms of historical rates plays a factor. Buying points is often more attractive when rates are already relatively low, since refinancing seems unlikely.

Buying down your rate can also make sense for borrowers prioritizing lower monthly cash flow or high-income professionals (like physicians) who value payment stability. And of course, if the seller or a builder is paying those points, paying points to buy down your mortgage loan rate can be even more attractive.

When You Should Probably Skip It

The first consideration to think of is how long you think you will be in the house. If you only see yourself staying in the area (or in that particular house) for 3-5 years, it will rarely make sense to pay points upfront, since the breakeven point is likely to be after you move. And in a market where interest rates are relatively higher, it can make sense to skip buying points, even if you think you'll still be in the home. That's because higher rates make it more likely that you'll have an opportunity to refinance down the line, wiping out any interest rate reduction you purchased on your original loan.

Early-career physicians often need liquidity more than payment optimization, and that's another reason to consider saving upfront money. That money could potentially be better spent on things like an emergency fund, paying down high-interest debt, or retirement investing.

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The Bottom Line

Buying down your mortgage rate isn’t inherently good or bad—it’s a math problem. Calculating the breakeven point can be one way to help you determine if buying down your interest rate is worth it, but it's not the only thing. Many physicians overfocus on optimizing mortgage rates while underfunding other investing goals. It's a good idea to consider mortgage decisions like whether to buy down your mortgage interest rate within the context of your entire financial plan.

Have you ever bought down the rate on your home? Was it worth it? Is it something you would do again?