Should I Buy Down My Rate?

With mortgage rates holding over 6%, I have had many clients ask about paying to buy down their rate. In this week’s newsletter, I will explain what a buy-down is and how they work. That will help you decide if a buy-down might make sense for your situation.

Mortgage rate buy-downs allow clients to reduce their interest rates by paying upfront. You may have heard this referred to as “points” or “origination fee.” But simply put, the borrower is paying upfront for a lower rate down the road. A permanent buy-down (which is what we are discussing today) reduces your interest rate for the life of the loan.

Typically, homebuyers pay one point for a quarter-percent reduction in the interest rate, but this varies based on the market. For example, for a $500,000 loan at 6.5%, the principal and interest would be $3160. If you paid a point, which would be one percent of the loan amount or $5000, you could lower your rate to 6.25%, which would be $3079 principal and interest. So, the $5000 upfront saves you $81/month. If you divide $5000 by $81, you can see that it would take just over 5 years to make up what you are paying upfront with the long-term savings.

The decision to buy down the rate and incur this additional cost at closing is based on the answer to this question; How long do I expect to stay in this mortgage? Many clients are saying to me that they expect to remain in the house for many years but hope to be able to refinance into a lower rate in the next couple of years, assuming rates come down. Those homebuyers should probably not buy down the rate. On the other hand, some clients are saying that no one knows if/when rates will come down and so they will pay for the savings now. The bottom line is that there is not a right answer, and you need to look at the options for each situation. Sometimes there is a “sweet spot” in the rate stack where you get more interest rate reduction for less cost, so a shorter break-even could make sense to do. Please contact me if you want more information.

Share This Story, Choose Your Platform!