Free Tool — MLO / NMLS Exam Prep
Discount Points & Buydown Calculator
Two things every NMLS candidate has to keep straight: discount points, which pay to permanently lower the note rate (1 point = 1% of the loan), and a temporary buydown (2-1 or 3-2-1), which subsidizes the payment for the first one to three years without changing the note rate. This tool computes the cost of both.
Discount Points & Buydown Calculator
Permanent rate buydown (discount points) and temporary 3-2-1 / 2-1 buydowns — both tested on the NMLS SAFE Act exam.
Points% × Loan Amount
Points × cut-per-point (rule of thumb)
1 discount point = 1% of the loan amount (not the purchase price). The ~0.25% rate cut per point is an NMLS exam rule of thumb, not a lender guarantee — actual buydowns vary by pricing.
For exam practice and estimation only — not a substitute for engineered design, manufacturer data, current codes, or a licensed professional's judgment. Verify all values before relying on them.
Worked Example
A borrower takes a $320,000 loan and pays 2 discount points.
- • Cost of points = $320,000 × (2 ÷ 100) = $6,400 paid at closing.
- • If those 2 points drop the rate enough to save $85/month, break-even = $6,400 ÷ $85 ≈ 76 months (about 6.3 years).
- • Now compare a 2-1 buydown on the same loan: the payment is calculated at a rate 2% lower in year 1 and 1% lower in year 2. The total of those first-two-years savings is funded up front into a subsidy account — the note rate never changes, and in year 3 the payment steps up to the full note-rate amount.
Exam takeaway: points quote against the loan amount and lower the rate permanently; a buydown is a temporary payment subsidy. Don't confuse the two.
Discount Points & Buydowns — Frequently Asked Questions
What is a discount point?
A discount point is a fee paid to the lender at closing to permanently buy down the note interest rate. One point equals 1% of the loan amount — so on a $300,000 loan, one point costs $3,000. Points are prepaid interest and are generally deductible. Each point typically lowers the rate by roughly 0.25%, though the exact reduction is set by the lender's rate sheet, not a fixed rule.
How do you calculate the cost of discount points?
Cost = Loan Amount × (Points ÷ 100). For 1.5 points on a $250,000 loan: $250,000 × 0.015 = $3,750. On the NMLS exam, watch whether points are quoted against the loan amount (the standard) rather than the purchase price — points are always a percentage of the loan.
What is a temporary buydown (2-1 or 3-2-1)?
A temporary buydown lowers the borrower's rate for the first few years using funds placed in an escrow/subsidy account, then the rate returns to the note rate. A 2-1 buydown means the rate is 2% lower in year 1 and 1% lower in year 2. A 3-2-1 buydown means 3% lower in year 1, 2% in year 2, and 1% in year 3. The buydown cost equals the total payment savings over those years and is funded up front — often by the seller or builder.
How is a discount point different from a buydown?
Discount points permanently reduce the note rate for the full loan term. A temporary buydown does not change the note rate — it only subsidizes the borrower's payment for the first one to three years, after which the payment steps up to the full note-rate payment. The exam tests that distinction: permanent (points) vs temporary (2-1 / 3-2-1).
How do you find the break-even point on paying points?
Break-even months = up-front cost of the points ÷ monthly payment savings from the lower rate. If 1 point costs $3,000 and lowers the payment by $50/month, break-even is 60 months (5 years). If the borrower keeps the loan longer than break-even, paying points saves money overall; if they sell or refinance sooner, it does not.
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