You’ll make a variety of decisions when you’re purchasing a home. One of them is whether you should “buy down” your mortgage. Not sure what that means, or if it’s right for your specific situation? Read on to help you decide.
What does it mean to buy down mortgages?
If buyers want to lock in a better interest rate for their mortgage loan, they can do it by buying down their mortgage. You might also hear this described as “buying points.” This process is usually negotiated between the potential buyer and lender, although sellers or builders may offer to buy down a mortgage to sweeten the deal.
So, what does it actually mean? One of the mortgage players pays additional money to secure a lower interest rate for the mortgage loan. Each point is equal to 1% of the loan value. A lower interest rate may make the monthly payment more affordable to the new homeowner.
Are there different types of buy downs?
Yes. Buying down a mortgage can be structured in a few different ways, depending on what you’re trying to accomplish.
- There’s a buy down that affects the life of the loan. This requires a large sum on the front end to ensure the mortgage rate stays the same for the length of the mortgage loan.
- A 2-1 buy down makes the interest rate 2 percentage points lower the first year and 1 percentage point lower the second year.
- A 3-2-1 buy down makes the first year’s interest rate 3 percentage points lower, the second year’s 2 percentage points lower, and the third year’s 1 percentage point lower.
When is buying down a mortgage beneficial to a homeowner?
Buying points is not the best move for every buyer. Having the seller or builder pay for the buy down is often more beneficial to the buyer, unless they raise the home price, which could wipe out the savings of a smaller interest rate. A buy down also makes sense if the borrower expects their income to rise significantly in the next three to five years.
For example, buyers who have just begun their careers may decide to use a buy down for the mortgage’s first few years. Since it takes a few years for a buy down to be worth the investment, people who don’t plan to move anytime soon may also be good candidates for a buy down.
When do buy downs happen?
You can expect to pay for a mortgage buy down during your closing.
Want to know more about buying points to decrease your mortgage interest rate? Or do you just have questions about mortgage loans in general? Don’t hesitate to reach out to our team at MIG to get those questions answered by our knowledgeable loan officers!