How Buying Down a Mortgage Interest Rate Works: A Simple Guide
Buying a home is exciting, but the thought of locking into a high-interest mortgage can feel like a financial weight. Thankfully, there’s a strategy called buying down your interest rate that might save you thousands over the life of your loan. Let’s break it down.
What Is a Mortgage Rate Buydown?
Buying down your mortgage rate—sometimes called “paying points” or “buying points”—means you pay an upfront fee to reduce your loan’s interest rate. This can lower your monthly payments and save you money over time.
The fee you pay for this reduction is measured in discount points. Each point typically costs 1% of the loan amount and reduces your interest rate by about 0.25% (though this varies by lender).
For example:
Loan Amount: $300,000
One Point Cost: $3,000
Rate Reduction: ~0.25%
By paying $3,000, you could lower your interest rate from 7% to 6.75%, saving you money on your monthly payment.
Types of Buydowns: Permanent vs. Temporary
1. Permanent Buydown
This option reduces your interest rate for the entire life of the loan. It’s a good choice if you plan to stay in the home for a long time.
Example:
Loan Amount: $300,000
Original Rate: 7%
Monthly Payment: $1,996
After Buying 1 Point: 6.75%
New Monthly Payment: $1,945
Monthly Savings: $51
In this case, the upfront $3,000 would take 59 months (just under five years) to recoup. After that, the savings are pure benefit.
2. Temporary Buydown
This option lowers your rate for a set period—often the first one to three years of the loan. These are sometimes offered by builders or sellers to make a home more attractive to buyers.
2-1 Buydown Example:
Year 1: Rate reduced by 2%
Year 2: Rate reduced by 1%
Year 3+: Full rate applies
If your original rate is 6%, the temporary buydown gives you 4% in year one, 5% in year two, and 6% after that. This can help you ease into higher payments.
Is Buying Down a Rate Worth It?
The decision depends on a few key factors:
How Long You’ll Stay in the Home
If you plan to move or refinance in a few years, a permanent buydown might not make sense. Temporary buydowns could be more appealing in this case.
How Much Cash You Have Upfront
Buying down your rate requires extra cash at closing. Make sure you don’t drain your savings or emergency fund to do it.
Your Break-Even Point
Divide the cost of the buydown by your monthly savings to calculate how long it’ll take to recoup your investment. If you plan to stay longer than that, it’s likely worth it.
How to Get Started
Shop Around: Not all lenders offer the same discount for points.
Ask for Scenarios: Request quotes with and without points to compare total costs.
Negotiate: Sellers or builders might be willing to cover the cost of points as part of the deal.
The Bottom Line
Buying down your mortgage rate can be a powerful tool to reduce your payments and save money in the long run—but it’s not for everyone. Understanding the math and your long-term goals will help you make the best choice for your situation.
Got questions about buydowns? Reach out to a trusted mortgage professional to explore your options!