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Rate Buydowns
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Rate Buydowns
When you get a mortgage, you DO have some control over your interest rate.
One way to get a better rate is through a rate buydown, which can lower your monthly payments.
Buying Mortgage Discount Points
The easiest way to buy down your mortgage rate is to buy discount points. Each point is 1.0 percent of your mortgage amount, and reduces your mortgage rate by 0.25 percent. For example, if you are offered a 6 percent interest rate on a $100,000 loan, you can pay one point ($1,000) to get a 5.75 percent interest rate instead. You can buy down your interest rate by up to 1.0 percent to reduce your interest costs and get a lower payment.
Before you choose to complete a rate buydown, make sure you take the time to compare your monthly savings with how long you plan to own the home. How many months will it take to break even? The longer you stay in the home, the more a rate buydown will pay off.
Sometimes you can roll the cost of discount points into your home loan, but this can defeat the purpose of the points by reducing your savings and changing your loan-to-value ratio, which may make other costs go up.
Temporary Rate Buydown
Some borrowers opt for a temporary buydown, offered by the seller. This approach involves the seller depositing funds into an escrow account upfront, effectively lowering the mortgage's interest rate for the initial one to three years. Consequently, this arrangement can temporarily decrease the monthly mortgage payments for the borrower. You can use our temporary buy down calculator here to see how it could work for you.
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