Finding strategies to save money while buying a home is always a sensible choice because it's a big milestone. Buying down your interest rate is one strategy that may enable you to save thousands of dollars over the course of your mortgage. Here are a few benefits of buying down the interest rate on your next home loan.
Understanding Mortgage Interest Rates
Let's quickly review what an interest rate is before getting into the intricacies of buying one down. A portion of your monthly mortgage payment includes interest which gets remitted to your loan investor (typically Fannie Mae, Freddie Mac, or Ginnie Mae) by your mortgage servicer. This interest is repaid to the loan investor over the term of your mortgage. Interest rates have a big impact on your mortgage's overall cost as well as your monthly payments.
What Does Buying Down Your Interest Rate Mean?
Buying down your interest rate involves paying an upfront fee, also known as discount points, to your lender at the time of closing. Each point typically costs 1% of the total loan amount and can lower your interest rate by a predetermined percentage. By paying these points upfront, you effectively reduce your interest rate and subsequently your monthly mortgage payments.
What are the Benefits of Buying Down Your Interest Rate?
There are many benefits of buying down the interest rate on your mortgage before closing. These advantages can help you save money, make homeownership more affordable, and potentially build equity more quickly.
Who Can Buy Down A Mortgage?
Even though the buyer or borrower benefits most directly from a buydown, the buyer is not the person that has to buy down the mortgage. Seller and Builders can also purchase points to lower the borrowers interest rate. Sellers may offer to buy down a buyer's interests rate to incentivize the buyer to purchase their home. If the seller chooses to do this, they can make a onetime payment into an escrow account or they can offer seller concessions. Similarly to Sellers, Home Builders may offer to pay points to buy down their buyers' mortgages. Typically Builders offer additional incentives for the early buyers in their developments to entice people to purchase properties in the newly built communities.
Long-Term Savings on Your Mortgage
Although it involves a one-time payment, lowering your interest rate might save you a lot of money over the course of your mortgage. The exact amount of savings depends heavily on how long you intend to stay in the house. When considering buying points, you should calculate the breakeven point using the following formula:
Breakeven Point = (Cost of the Points) / (Monthly Savings)
The breakeven point is the amount of time it would take you to recoup the money you spent on the discount points. If you plan on being in the home longer than the break even point it probably makes sense for you to purchase the points. However, if you think you will refinance or sell the house before that term than you probably should not purchase the discount points.
Lower Monthly Mortgage Payments
Your monthly mortgage payments will be lower with a lower interest rate, which may make it easier for you to manage your budget and give you more financial flexibility.
Lower Total Cost of Borrowing for Your Home
With a reduced interest rate, the total amount of interest you pay over the term of your loan will be lower. This can save you thousands or even tens of thousands of dollars, depending on the size and duration of your loan.
Buying down your interest rate for your mortgage can be a great option when you decide to purchase a home. Your mortgage loan officer can help you determine the best strategy for your situation. For over 90 years the experts at Standard Mortgage (NMLS#: 44912) have been helping home buyers and homeowners with all of their mortgage needs.
