Last updated: • Not financial advice
What Are Discount Points?
Discount points are upfront fees paid to reduce the note rate. One point typically equals 1% of the loan amount, though lender pricing varies. Buydowns can make sense when your holding period is long enough for payment savings to exceed the upfront cost after taxes. See background from the CFPB on points (consumer context) and benchmark market rates at FRED.
How Lenders Price Buydowns
- Nonlinear pricing: each point may not reduce the rate equally.
- Caps: lenders often limit points; confirm maximums.
- Refundability: points are usually nonrefundable; early payoff reduces benefit.
Break‑Even Calculation
- Compute upfront cost (points × loan amount).
- Find payment delta between Base and Buydown scenarios in the calculator.
- Divide upfront cost by monthly (or quarterly) savings to get months‑to‑break‑even.
- Adjust for holding period, taxes, and prepay penalties.
Example
Financing $1,000,000 for 10 years at 8.0% vs 7.5% with 1.5 points ($15,000). If monthly savings is ~$300, break‑even is ~50 months. If you plan to hold 7–10 years, it can pencil out; if you plan to sell in 24–36 months, it likely won’t.
Sensitivity and Risks
- Early sale/refi: You may not recover the upfront cost.
- Cash constraints: Diverting cash to points can reduce reserves for maintenance/insurance.
- Tax treatment: Consult a CPA about deductibility or capitalization—see IRS Pub 535.
When Buydowns Shine
- Long holding periods with stable usage and strong liquidity.
- High coupon loans where points materially reduce APR.
- Borrowers prioritizing lower payments to fit budgets with margin.
When to Avoid
- Short horizons or likely refinance in 1–3 years.
- Thin liquidity or competing higher‑ROI uses for cash.
- Uncertain aircraft value trajectory or planned upgrades.
Points vs Lender Credits
Some lenders offer the inverse of points—credits—in exchange for a slightly higher rate. Credits can reduce cash at close (helpful if reserves are tight) but increase total interest. Model both to decide whether near‑term liquidity or lifetime cost matters more.
After‑Tax Analysis
If interest is deductible for your business use, the effective cost of borrowing falls, which changes the break‑even on points. Coordinate with your CPA to estimate after‑tax savings and incorporate them into your model. See IRS Pub 535 for business expense principles.
Workflow
- Price base vs buydown quotes side‑by‑side (rate, points, fees).
- Model in the calculator; export CSVs; compute break‑even months.
- Stress test: vary holding period ±2 years and APR ±100 bps.
Related Articles
External references: CFPB: Discount points · FRED data · IRS Pub 535