Buying Down Rates En Vogue As Higher Rates Persist
Should I Buy Down My Interest Rate?
Assuming the Federal Reserve cuts mortgage rates as investors expect, the housing market appears to be heading for a recovery this year.
Borrowers may choose to buy down their interest rate when interest rates are high in order to reduce their monthly payments and make their mortgage more affordable.
When you buy down the interest rate, you pay more up front so that you get a lower rate and monthly payment. Points are also called “discount points” when purchased this way.
It is rare for borrowers to pay higher closing costs to get a discount when interest rates are low. In spite of this, borrowers are more likely to evaluate the advantages and disadvantages of purchasing points as interest rates rise. Here’s what you need to know.
How does a Mortgage Buydown work?
Based on the type of loan and the mortgage lender, the rate reduction per point varies. On the other hand, a mortgage point decreases your rate by about 0.25% and costs 1% of your loan amount.
Let’s look at an example, using a $400,000 mortgage amount:
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- Original mortgage quote: $400,000 mortgage at 6.25%
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- One discount point costs $4,000
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- One point lowers the rate by 0.25% (from 6.25% to 6.00%)
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- Over 30 years at 6.25%, you’d pay $486,600 in total interest
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- Over 30 years at 6%, you’d pay only $463,300 in total interest
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- Extra upfront cost of buying points: $4,000
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- Savings from buying points: $23,300
It depends on your loan and lender how much you can save and how much interest you can reduce. Your loan officer can provide you with several quotes, both with and without points, so you can see what you might save and how much you might save.
If you want to reduce the interest rate on your mortgage, you need to purchase discount points (also called mortgage points). Choosing a Texas lender who offers lower rates over time will require you to pay a fee upfront at closing. Conventional, Texas FHA, Texas VA, and Texas USDA mortgage loans all allow buyers to purchase discount points.
Pros and Cons of Buying Down Mortgage Rates
Borrowers have to weigh upfront costs against potential long-term benefits when deciding whether to buy down their mortgage interest rate. Investing in mortgage points has the following pros and cons:
PROS:
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- Lower mortgage interest rate
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- Lower monthly mortgage payment
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- Potential to qualify for a larger loan amount
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- Save money over the life of the loan
CONS:
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- Increased closing costs
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- Potential to lose money if you refinance or sell within 5 years
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- Depletes your savings
- Potentially less money to spend on a down payment
Lower rates can save you money on both your monthly payments and total interest payments over the life of the loan.The biggest reason to buy down your interest rate is to get a lower rate on your mortgage loan, regardless of credit score.
In addition:
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- If your income is too low for you to qualify for the house you want, you may be able to afford the purchase price with a reduced interest rate and payment
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- If you can convince a home seller to pay discount points for you, buying down your interest rate may help you qualify for your mortgage loan
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- Since discount points represent prepaid mortgage interest, the cost is often tax-deductible (provided that you itemize your deductions). Ask a tax professional for more information
First-time home buyers who anticipate staying in their homes for a long time often choose to buy down their interest rate. That’s because the early years of homeownership can be more expensive, and first-time home buyers’ incomes may be lower. A better rate can drop your monthly payments and even help you qualify for a more expensive home.
No matter what your credit score is, you should try to buy down your interest rate if you want to get a lower rate on your mortgage loan. Your monthly payments as well as your total interest payments over the life of the loan can be reduced if you get a lower rate
