How To Buy Down Your Interest Rate | LendingTree (2024)

FAQs

How To Buy Down Your Interest Rate | LendingTree? ›

You're buying a lower rate for your entire loan term with a permanent mortgage rate buydown. The lender offers a lower rate by charging mortgage points. Typically, the more points you pay the more you can reduce your mortgage rate. The rate never increases as long as you keep your loan.

If you plan to stay in your home for an extended period, buying down the rate could be advantageous, allowing you more time to recover the upfront expenses through lower monthly payments. On the other hand, if you anticipate selling or refinancing in the near future, the initial cost might not be worthwhile.

Mortgage points

One mortgage point typically costs 1% of your loan and permanently lowers your interest rate by about 0.25%. If you took out a $150,000 mortgage, for example, one point would cost $1,500 and get you a 0.25% discount.

Each mortgage discount point typically lowers your loan's interest rate by 0.25 percent. One point would lower a mortgage rate of 6.5 percent to 6.25 percent for the life of the loan.

Loan Structure

With a permanent buydown, points are paid to the lender to permanently reduce the interest rate for the life of the loan.

Considering the fact that one mortgage point buys your mortgage rate down by 0.25%, if you want to buy down a full 1% on your mortgage rate, you'll need to purchase four points. Based on the example above, assuming a $344,800 mortgage, four discount points will cost you $13,792.

With a 3-2-1 buydown mortgage, the borrower pays a lower than normal interest rate over the first three years of the loan. The loan interest rate is reduced by 3% in the first year, 2% in the second year, and 1% in the third year; for example, a 5% mortgage would be just 2% in year one.

In an interest rate buydown, the seller pays mortgage points on the buyer's mortgage, lowering the interest rate. Permanent buydowns are more beneficial than price reductions for the buyer and the seller. Also called seller buydowns, they're better for buyers who plan on living in the same house for a long time.

Typically, though, most lenders will only let you buy up to four mortgage points. When you're shopping for a mortgage and determining whether buying points makes sense, you must first calculate how long it would take you to recoup the upfront costs of purchasing these discount points.

Mortgage points, also known as discount points, are a form of prepaid interest. You can choose to pay a percentage of the interest up front to lower your interest rate and monthly payment. A mortgage point is equal to 1 percent of your total loan amount. For example, on a $100,000 loan, one point would be $1,000.

How much is 2 points on a mortgage? ›

One mortgage point typically costs 1% of your loan and permanently lower your interest rate by about 0.25%. If you took out a $200,000 mortgage, for example, one point would cost $2,000 and get you a 0.25% discount on your interest rate. Two mortgage points would cost $4,000 and lower your interest rate by 0.50%.

Example of Paying Discount Points

On a $100,000 mortgage with an interest rate of 3%, your monthly payment for principal and interest would be $421 per month. If you purchase three discount points, your interest rate might be 2.25%, which puts your monthly payment at $382 per month.

Each point is equal to 1 percent of the loan amount, for instance 2 points on a $100,000 loan would cost $2000.

Temporary: Buydowns typically aren't permanent — they typically last anywhere from one to three years. Default risk: The increase in mortgage payment could come as a surprise for some buyers and increase their chances of not being able to pay their mortgage.

Once the buydown rate ends, your monthly payment could be higher than expected. A buydown may not be an option for certain property types or loan types. If your income doesn't increase, then you could struggle with making monthly mortgage payments.

With permanent mortgage buydowns, as long as the borrower is applying for a fixed-rate mortgage rather than an adjustable-rate mortgage, the reduced interest rate will stay the same for the life of the loan.

Generally speaking, mortgage buydowns enable buyers to lower their monthly mortgage payments either permanently or in the first few years of their loan. By paying discount points at closing, buyers can reduce their interest rates slightly, which can lead to long-term savings.

Points can increase your closing costs by thousands of dollars. But it's a high upfront cost that may be worth it if you stay in the home long enough to see savings from the reduced interest rate. Paying extra money upfront could mean tens of thousands of dollars in savings over your mortgage.

The Fed lowers interest rates in order to stimulate economic growth, as lower financing costs can encourage borrowing and investing. However, when rates are too low, they can spur excessive growth and subsequent inflation, reducing purchasing power and undermining the sustainability of the economic expansion.