What Are Mortgage Points and How Do They Work? Permanent Buydowns Explained~
Let’s face it—when you see a property you love, if you’re not paying cash, the first thing that crosses your mind is: “How is the loan going to work?”
Of course, you’ll talk with your trusted Hawai‘i lender to get the details, but I also know many first-time (and even second-time) buyers want to understand the basics and see what options are out there.
This blog is going to cover one of those options: the permanent buydown. Last week I shared about the 2-1 buydown (a temporary way to ease into your payments). Today, we’re focusing on permanent buydowns—what they are, how mortgage “points” work, and whether they’re worth it.
What Is a Permanent Buydown?
A permanent buydown is when you (or sometimes the seller) pay extra money upfront at closing to lower your mortgage interest rate for the entire life of the loan.
Instead of just easing your payments for the first two years like a 2-1 buydown, this strategy gives you lasting savings every month.
But before we can understand how a permanent buydown works, it helps to first understand what a point is.
What Is a Mortgage Point?
Mortgage points are the tool that make a permanent buydown possible.
1 point = 1% of your loan amount (not the purchase price).
• Example: On a $1,000,000 loan, one point costs $10,000.
Each point usually lowers your interest rate by about 0.25%.
So 2 points would roughly lower your rate by 0.50%, 3 points by about 0.75%, and 4 points by about 1.0%.
That’s why points are often called “discount points.” You’re paying some of the interest upfront to secure a lower rate for the life of your loan.
A Note on Down Payments in Hawai‘i
For loans in Hawai‘i, it’s often best to put 20% down if you can. Doing so helps you avoid private mortgage insurance (PMI), which is an added monthly cost on top of your mortgage. In some cases, lenders even require 20% down depending on the loan program and property type.
If you’re already planning to put down 20% or more, then it may be worth looking at whether setting aside extra cash for a permanent buydown makes sense for your budget.
A Simple Example (Using $1M Loan with 20% Down)
Let’s say your purchase price is around $1.3M (close to the Maui median for single-family homes), and you’re putting 20% down. That gives you a loan amount of about $1,000,000. For this example, I’m using a 6.5% interest rate to keep the numbers simple. Rates change often, so your exact payment would depend on the rate you lock in with your lender.
No points: 6.5% → Payment ≈ $6,320/month (principal & interest).
Buy 2 points ($20,000 upfront): 6.0% → Payment ≈ $5,995/month → saves $325/month.
Buy 3 points ($30,000 upfront): 5.75% → Payment ≈ $5,830/month → saves $490/month.
Buy 4 points ($40,000 upfront): 5.5% → Payment ≈ $5,670/month → saves $650/month.
Is a Permanent Buydown Worth It?
It depends on two things: how long you’ll keep the loan and how much upfront cash you’re comfortable spending.
The key idea is the break-even point—how long it takes for your monthly savings to equal the upfront cost.
At 2 points ($20K), you save $325/month. Break-even is about 62 months (just over 5 years).
At 3 or 4 points, the break-even takes longer—but the monthly savings ($490–$650) can provide significant breathing room in your budget.
Here’s how to know if a permanent buydown may be right for you:
Long-Term Stay: You plan to stay in your home at least 5+ years. The longer you keep the mortgage, the more you benefit from lower payments.
Upfront Cash Available: You have extra money at closing to pay for the points—and no better use for it (like paying off high-interest debt or funding emergencies).
Break-Even Point: You’ve calculated how long it will take to recoup your upfront cost.
~ Formula: Buydown cost ÷ Monthly savings = Months to break even.
No Better Investment: The interest savings are stronger than what you’d expect to earn by investing that cash elsewhere.
When it might not be right:
You may sell or refinance before hitting the break-even point.
You need the cash for other expenses or investments.
You have higher-priority uses for your money (emergency fund, retirement, or paying off higher-rate debt).
Quick Comparison: 2-1 Buydown vs. Permanent Buydown vs. No Buydown
No Buydown
How it works: Standard 30-year fixed at market rate.
Example payment on $1M loan @ 6.5%: $6,320/month.
Pros: Simple, no extra upfront cost.
Cons: Highest monthly payment.
2-1 Buydown
How it works: Rate is 2% lower in Year 1, 1% lower in Year 2, then back to 6.5%.
Example payments: Year 1 ≈ $5,030 / Year 2 ≈ $5,670 / Year 3+ = $6,320.
Pros: Lower payments in the first 2 years, often seller-funded.
Cons: Payments jump in Year 3, savings are temporary.
Permanent Buydown
How it works: Pay points upfront to reduce the rate for the life of the loan.
Example payments: 2 points (6.0%) = $5,995 / 3 points (5.75%) = $5,830 / 4 points (5.5%) = $5,670.
Pros: Long-term savings, predictable lower payments.
Cons: Higher upfront cost, takes years to “break even.”
My Take
A permanent buydown can be a smart strategy for buyers who want long-term stability and know they’ll be in their home for a while. But it’s not one-size-fits-all—the best option depends on your plans, your budget, and how long you expect to keep the loan.
That’s why I always recommend talking through the numbers with a trusted Hawai‘i lender. They can run scenarios side by side and help you see what makes the most sense for your situation.
In the big picture, the loan and the house have to make sense for your unique goals, your budget, and the way you want to live. And at the end of the day, it’s not just about interest rates—it’s about creating a home where you and your family …pets included 🐾, feel comfortable and at ease.
