Naturally, having a good credit score and making a down payment of 20% or more can help you secure the best interest rate, but there’s something else you can do to lower that rate even further. It’s called a mortgage rate buydown.
What Is a Mortgage Rate Buydown?
With an interest rate buydown, you pay an additional fee for a lower interest rate at closing, something many people refer to as “prepaying” your interest. This is done by paying points during a purchase or refinancing transaction to buy down your rate.
By securing a lower rate, you not only lock in a lower monthly payment but also end up paying less for your loan over time. There are two ways a borrower can buy down their interest rate—a temporary or permanent buydown.
APM offers a 2-1 temporary buydown and a 3-2-1 temporary buydown for our borrowers. To learn more about temporary buydowns click here.
How Do You Buy Points?
One mortgage point is equal to 1% of your loan. Lenders will usually give somewhere around a 0.25% rate reduction for each point paid (this may vary based on the market).
Want to reduce your loan a tad without breaking the bank? After all, you are putting down a hefty down payment as well. That’s totally doable!
Points can be purchased in smaller increments, as little as 0.125%. Pay a little upfront, get a little reduction. Pay more upfront, get a more substantial reduction.
Is a Rate Buydown Right for You?
There are certainly pros and cons with mortgage rate buydowns, and they often come down to working out the “breakeven” point in your loan. This is the date at which your monthly interest rate savings has equaled the amount you paid upfront for the points.
If your plan is to stay in the house for a while, it might be worth it: Most borrowers find that their breakeven point is right about five years. This means the savings you get in your interest payments, added up, now surpass the amount you paid upfront to lower your interest rate.
It can be a little tricky to figure it all out, but this is where we come in! Your APM Loan Advisor can help by providing a breakdown showing you real numbers based on your specific scenario. Then you can make an educated decision on whether buying down your interest rate makes sense in your situation.
Here are some other articles with information on interest rates that you might find helpful: Factors That Influence Mortgage Interest Rates and Mortgage Interest Rates: Float vs. Lock Strategies.