First Time Homebuyer Information & Education
Buy-down - "My broker says I can buy-down the rate on my mortgage. What does that mean, and how does it affect my payments?"
If you "buydown" the rate on your mortgage you are simply paying money up front to reduce the interest rate on your loan.
This is used to reduce your mortgage payment, and also may be tax deductible.
Rate buy down fee - This is a fee paid to ‘buy’ your interest rate down. It is also commonly referred to a as loan discount fee.
There is not always a consistent ratio between the discount points you pay and the amount it lowers your interest rate. The first point you pay may lower your interest rate by 0.25% but the second point may lower it by more or less than 0.25%. If you are interested in buying down your interest rate, have your mortgage broker work up several options. Make sure you calculate not only the cost and monthly savings, but the break even point as well.
Should I pay discount points to buy my rate down? - Discount points are prepaid interest, which you can pay to your broker at closing in exchange for a lower interest rate on your mortgage. Paying discount points, each of which is equal to 1% of the loan amount, is often called “buying down” your rate.
Buy-up - "My broker says I can buy-up my mortgage. What does that mean, and how can it affect my payments?"
Should You Buy Points? - How do you "buy" a better rate?
You should be sure whether the loan you are getting into includes points or not. If it does, make sure that it is in your best interest. Will the money you save every month with a lower interest rate recoup the amount you pay in points before you sell or refinance?
Please note, when measuring the option to buy down your interest rate with points, the interest rate does not move in equal incriments as the cost. For example buying down an interest point by .25% or 1/4, will not cost exactly .25%. Also, the lower the interest rate the higher the increments of cost apply.
The loan programs that usually make sense to consider buying down the rate with points would be the 30, 20 or 15 year fixed. By selecting a long term fixed program, you are indicating that you plan on keeping your loan for a long period of time. By buying down the rate, you can save money over the long haul.
There are several things to consider when buying points. One of which is how long your going to stay in your loan. If its the final loan on the house then you may want to buy that interest rate as low as possible.
Points to buy down interest rates are actually interests paid in advance. It is considered finance charge and therefore tax deductable. Always consult a certified tax accountant before taking such deductions as many various rules apply, such as different deductabilities of purchases and refinances.
Pay very close attention to your loan figures and numbers when you are shopping around for a mortgage loan. One mortgage professional may be quoting you an interest rate that is going to cost you 3 points or 3 percent of the loan amount to obtain, while the other mortgage professional is quoting you a rate that is not paying any points for the mortgage interest rate. Ask, if the rate includes points or not. Look at your GFE, good faith estimate, and see if there is a line item that states discount points with a fee or dollar amount listed there. If the discount points line is completed, then the rate you are obtaining is going to cost you points. Decide what your immediate and future plans are before deciding whether you would like to buy points or not. Sometimes it makes sense and sometimes it doesn't. A good mortgage professional should be able to guide you to make a good decision for your situation.
When deciding whether or not to buy points, also consider all the other costs involved with your new loan. Sometimes buying points may eat up more of your home's equity and you may not feel comfortable with that. If you are refinancing, it is usually a good idea to leave some equity in your home in case of emergencies or the need to sell quickly.
Information listed above is to be used for educational purposes only and is not guaranteed
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