Understanding Mortgage Rate Buydowns

14 June 2022
 Categories: , Blog


There are few issues more important than the interest rate on your new home loan. A rate buydown, however, can be a great way to get that perfect rate. Read on to find out what a mortgage rate buydown is and how it works.

Interest Rates Are an Important Factor

Every mortgage applicant wants to get a low mortgage rate because the rate you agree upon will have a huge effect on your loan. It can affect the amount you pay for you loan overall, and it can also influence how much you can afford to pay for your home. In some cases, a point (a single percentage point) can cost buyers thousands of dollars on a home purchase.

Enter Mortgage Rate Buydowns

Mortgage applicants may have the opportunity to buy down their mortgage rate by prepaying some of the interest upfront. This may also be referred to as paying points. This allows the buyer to lock in a lower interest rate. Lowering the interest rate could result in lower monthly payments, and that benefit can mean a lot to buyers.

More About Points

A point is a single percent, so one point equals 1% of your loan. A point buydown can result in a rate reduction that varies depending on the circumstances and the lender. For example, if your home costs $300,000, 1% is $3,000. That money is due at the closing table and can result in a rate reduction of almost any increment of a point. You don't necessarily have to pay 1% for your rate buydown, though. You can pay even less or even more depending on your situation.

Are Rate Buydowns a Good Thing?

It could take some math to determine the value of your rate buydown because every loan situation is different. It's important to determine when the use of a buydown allows you to reach the break-even point. That is, when the amount you have saved on the interest equals the amount you paid for the buydown. That break-even point will matter more if you are not planning to stay in your home for very long. Most of the time, you will need to remain in a home for several years to make a mortgage rate buydown worth the cash you use to pay for it.

Sit down with your lender and have them work through the various scenarios with you. Find out how you can save money by lowering your interest rate and when you will break even on the buydown by talking with a lender.

Contact a mortgage lender to learn more.