One of the most important elements of a successful homebuying journey is knowing your options. There are choices to make throughout the process that can save you money in the long run.
A mortgage buy-down is one of those options to consider. Let’s talk about what it is, and the benefits and drawbacks of using it.
What’s a Mortgage Buy-Down?
When borrowers pay in advance to lower the interest rate on their mortgage loan, it’s referred to as a mortgage buy-down (also called paying for discount points). Borrowers essentially buy down the mortgage interest rate upfront for the life of their loan.
Benefits of a Mortgage Buy-Down?
There are two significant benefits that compel some homebuyers to choose a mortgage buy-down in their purchasing journey.
- It reduces monthly interest costs. A buy-down can decrease your monthly mortgage payment amount. A lower mortgage payment won’t strain your budget as much and can free up funds for other important things.
- It saves money in the long run. By securing a lower interest rate for your mortgage, you can save money every month. Over the 15, 20 or 30 years of your mortgage loan’s life, these savings can add up to a lot of money.
Drawback of a Mortgage Buy-Down?
As with any decision, you must weigh the good things about it with the not-so-great. The negatives about using a mortgage buy-down are:
- It can be costly upfront. Buy-downs can cost several thousand dollars at the beginning of your purchasing process. Since saving a down payment to secure a mortgage can tax your budget to the limit, making a buy-down could be out of reach.
- Some buy-downs are temporary. Depending on how the buy-down is structured, it may not be available over the entire life of your mortgage loan. It this is the case, using it might not be worth the expense.
When Should You Consider a Mortgage Buy-Down?
Certain situations make mortgage buy-downs a better option than others. Consider a buy-down if you:
- Plan on living in the home long-term. If you’re buying a starter home or expecting to move in a few years, paying for a buy-down may not benefit you.
- Are dealing with high interest rates. In a high-interest market, a buy-down can increase a home’s affordability.
- Have a surplus of savings. If you have a healthy down payment ready to go and money left over, putting it to work in a buy-down may be a savvy financial move.
Talk to your loan officer about buy-downs to determine if they’re right for your situation. Whether you choose to use a mortgage buy-down, knowing how the process works and what it can do for you is an integral part of your homeownership education.
Contact MIG today to discuss your mortgage options with one of our local loan officers and get pre-approved for a loan.