Should You Buy Down Your Mortgage Interest Rate

Rising interest rates can be a major concern if you’re shopping for a new home. A higher rate reduces your buying power and increases the home cost thousands of dollars over the course of the loan. One option to avoid this is to “buy down” your loan rate. This allows you to purchase your home at a more attractive rate.

A rate buydown is when you pay an upfront fee in exchange for a lower interest rate. This increases your closing costs and for every 1% of the purchase price you pay in points, your mortgage interest rate is reduced. Buying a lower interest rate may be a good strategy for a home you intend to keep for a long time, thus making up the difference over the life of the loan.

There are a couple options for a rate buydown. The first is a simple payment of increased closing costs up front in exchange for a lower interest rate. The buydown lasts for as long as you have the loan and is requested by the buyer.

The second is a temporary buydown often initiated by a seller or lender to incentivize a purchase. In this case, the buydown is for a set period, two or three years, and then the rate will return to the higher rate if the borrower does not refinance. In this shifting market we are seeing more sellers being willing to offer a rate buydown for the buyer. This strategy is a good one for either a starter home or if one believes the interest rates will be lower in a few years.

Here is a great link with details and a video explaining how a buydown works by using the home shown below, which is currently on the market, as the example. I will be hosting an open house at this beautiful home this Saturday, October 29th, from 11-2. The seller on this property is motivated and willing to work with the buyer on a rate buydown. I will have plenty of information on the financing options to share with you at the open house.

Utilizing a buydown as part of your loan origination can be a smart way to save money and maximize your purchasing power.