Rate Buy-Down: Is it worth the cost? Weighing the pros and cons

Depending on the day, you may hear a different story about the real estate market. Rates are up, rates have gone down. There are no buyers. Available housing isn’t keeping up with demand…

Rate buy-downs are being discussed when purchasing a home using a mortgage. You may hear this called ”points”, “reduction”, or “prepaid interest” to name a few.

For some buyers, paying an additional fee at closing to lower the interest rate may have benefits. Understanding the cost is critical.

Some potential benefits to a homebuyer may include lowering a monthly mortgage payment or lowering the interest rate. These may be essential for a buyer to qualify for a higher priced home. Once a home reaches the break-even point, money will be saved on interest. A good rule of thumb is that 1 point will typically buy down a rate .25%. Please check with your lender for the current buy down rate, as this can change.

To consider the negatives, let’s start with what a point costs: 1% of the purchase price of your home.. This increases closing costs (cash needed for closing). If you are a buyer planning to refinance as quickly as possible, the interest saving will not occur if you have not reached the break-even point. Also, a poor utilization of funds if you know you aren’t going to be in this home for the long term, or the chance of refinance is high.

What is the break-even point? It is the point when the amount that was paid upfront to buy down the interest rate is equal to the amount of money you have saved in interest on your mortgage payments. Recent hikes in interest rates have reawakened the buy down discussion. However, before you make a decision, meet with your lender, talk to you real estate advisor, and be sure to discuss your goals, including financial to determine if a buy-down is right for you.