One of life’s major milestones is buying a home. It’s a place to settle, unwind, grow with a partner, and raise children and pets alike.

These are all of the exciting parts of homebuying. A less exciting one is interest rates. If, like most people, you need to take out a mortgage to purchase a home, then interest rates could make you nervous or even deter you from buying at all.

However, these percentages added onto your loan principal are less rigid than you might think. You have an option to decrease them in the form of buying mortgage points. Take a look at what this entails and whether it could be a viable solution for you as you consider your homebuying dreams.

The basics

Typically, one point costs 1% of the loan amount, although the amount it reduces your interest rate varies by lender and market conditions. But generally, if you’re approved for a $400,000 loan at 6.25 percent interest, for example, you can pay $4,000 up front to decrease that interest rate to 6 percent.

This means that you will need to make an additional significant payment at closing, alongside any down payment and closing costs, but in exchange you will pay less in interest fees as the months and years of paying toward your mortgage pass.

For substantial interest savings over time, you can buy multiple points to slash your interest rate further, although lenders may limit how many points you can buy, depending on loan type and regulations. Always check with a real estate agent or mortgage professional to learn how much leeway you have.

Potential drawbacks

The benefits of buying mortgage points may seem obvious, but actual results can vary. For one, you’ll need to own the residence for a significant period of time for your interest savings to start outweighing your point purchase. This can mean that if you’re buying a home to occupy short-term or as an investment property, buying mortgage points could result in you losing money in the end.

Additionally, this route may be a poor choice if your cash assets are limited and you are unable to fork over a significant amount of money up front. If buying mortgage points means decreasing your down payment, then it may not do you much good.

Another possible concern about buying mortgage points is that they provide discounts toward the fixed-rate period of the loan term. So long as the interest rate remains unchanged, your purchased point(s) will still provide discounts. However, if you’re securing financing via an adjustable-rate mortgage—which adjusts periodically after an initial fixed period (e.g., annually), depending on the loan terms—then your discount may only apply until the interest rate first changes. As with making a short-term real estate purchase, you’ll need to consider if there’s enough of a runway after buying a point for your interest savings to pay off.

When you can profit

A basic break-even estimate can be calculated by dividing the total cost of the point(s) you purchase by the monthly savings amount. The result is the number of months it will take to break even, and any months afterward will begin saving you money (provided the interest rate doesn’t change). Be sure to make this calculation on every loan option you’re offered before deciding how to proceed.

Making careful moves

Buying mortgage points is just one component of a prudent real estate decision. Like every step of your homebuying journey, this will require careful consideration before you proceed, likely with the help of a real estate agent and mortgage professional. Speak with an expert before you decide, and you could end up pursuing a route that pays off over time.