Should You Buy Down Your Mortgage Interest Rate?

Rising interest rates can be a major concern if you’re shopping for a new

home. A higher rate reduces your buying power and increases the home

cost thousands of dollars over the course of the loan. One option to avoid

this is to “buy down” your loan rate. This allows you to purchase your home

at a more attractive rate.

A rate buydown is when you pay an upfront fee in exchange for a lower

interest rate. This increases your closing costs and for every 1% of the

purchase price you pay in points, your mortgage interest rate is reduced.

Buying a lower interest rate may be a good strategy for a home you intend

to keep for a long time, thus making up the difference over the life of the

loan.

There are a couple options for a rate buydown. The first is a simple

payment of increased closing costs up front in exchange for a lower

interest rate. The buydown lasts for as long as you have the loan and is

requested by the buyer.

The second is a temporary buydown often initiated by a homebuilder or

lender to incentivize a purchase. In this case, the buydown is for a set

period, two or three years, and then the rate will return to the higher rate if

the borrower does not refinance. This strategy is a good one for a starter

home or if one believes the interest rates will be lower in a few years.

Utilizing a buydown as part of your loan origination can be a smart way to

save money and maximize your purchasing power. It’s important to

recognize the breakeven point, however, so that you know when you have

started gaining money on the plan.