Interest Rate Buy-downs
Many home loan companies advertise extremely low rates but what you may be missing is that many times in the fine print they are quoting a rate that includes a buy down. So what is a mortgage rate buy down?
A mortgage rate buydown is when a borrower pays an additional charge in exchange for a lower interest rate on their mortgage. Just like lenders can help cover the borrower's closing costs by charging a slightly higher interest rate, the door swings both ways. Borrowers can essentially buy a lower interest rate upfront.
An interest-rate buydown is a tool that can help you qualify to purchase a higher-priced house or get a lower rate on your refi. A buydown allows you to pay extra (tax-deductible) points up front in return for a lower interest rate for the first few years.
So when does buying down your rate make sense?
To determine whether buying down your rate (aka paying points) makes sense, you have to calculate how long it takes your monthly interest cost savings to repay the cost of the points.
In this example, $3,000 in points gives you monthly interest cost savings of $62.50. So we divide $3,000 by $62.50, which shows us that it takes 48 months — or four years — for the interest cost savings to repay the points.
If it takes four years to break even on paying points for a 30-year fixed loan, this provides many years after the breakeven period to benefit from the lower rate.
This breakeven calculation is the key to determining whether buying down your rate makes sense.
Generally, paying 1 percent of the loan amount in points will lower your rate by .25 percent, but this isn’t always the case. Give me a call and I can provide options for paying points (or buying your rate down) so you have a few options to analyze for favorable breakeven timelines.
TMG Home Loans
Cell - 562-968-7004
Fax - 949-207-7608
NMLS 1478632 / BRE 1863312