Many borrowers have the option to get a permanent buydown mortgage, which lowers their interest rate and monthly mortgage payment, enabling them to save money over the life of the loan.
In this article, we explain the basics of a permanent buydown mortgage, so you’ll know about this money-saving option.
What is a Mortgage Buydown?
A mortgage buydown (also called “buying down the rate”) occurs by buying points, which in turn lowers the interest rate, resulting in a lower monthly payment.
The points can be paid by the borrower, the builder or developer, or the seller. Furthermore, the points can even be financed, which we discuss near the end of this article.
If, for example, you could pay $2,000 to reduce your interest rate .25%, lowering the interest rate on a 30-year fixed rate mortgage from 4.25% to 4.00%, you would save a little over $10,000 during the 30-year term of the loan.
Points Paid by the Borrower
The most common method of buying down a mortgage is for the borrower to buy points because borrowers reap the benefits of a lower interest rate.
Points Paid by the Builder or Developer
Builders and developers will sometimes incentivize homebuyers by offering to buydown their mortgage.
Though you may find a builder who will pay for a permanent buydown, builders typically opt to offer a temporary buydown, meaning that your interest rate will be lower for the first few years, then return to the normal rate for the remainder of the loan.
Points Paid by the Seller
Highly motivated sellers occasionally offer to pay for points to lower a homebuyer’s interest rate.
The seller may pay the points merely to incentivize homebuyers. Sometimes, though, sellers will buydown the mortgage so the monthly payment is lower, allowing a buyer to qualify for a loan to buy the home.
Related: Should You Buy Points to Lower Your Mortgage Interest Rate?
Permanent Buydown Mortgages
A permanent buydown mortgage has a lower interest rate for the entire term of the loan. So, if a borrower gets a 30-year fixed rate mortgage with a permanent buydown, the interest rate will be lower for all 30 years.
When considering whether to pay for points to buy down a mortgage, it’s important to calculate the break-even point, which will tell you how long you have to stay in the home for the savings to equal what you paid in points. Typically. it takes 3-6 years to break even from buying down a mortgage. So unless you will stay in a home at least 5 years, it’s probably not worth buying down the rate for most people.
Financed Permanent Buydown Mortgages
A financed permanent buydown mortgage allows points to be financed, which can be advantageous for homebuyers in some situations, especially if they will be in the home a long time.
Financing points allows borrowers to pay a lower monthly mortgage payment, without having to pay for points at closing. Furthermore, it allows them to hold on to their cash, resulting in more buying power.
In most cases, if a borrower has the cash, it’s financially advantageous to buy points rather than finance them. The exception is for borrowers who earn a decent rate of return on their money and are in a very low tax bracket.
Related: 4 Things Every Borrower Should Understand About Mortgage Math
Marimark Mortgage is based in Tampa, Florida, and serves the mortgage needs of homebuyers and homeowners in Florida, Virginia, and Pennsylvania.
We specialize in conventional home mortgages, FHA, VA, and USDA mortgage options, refinance loans, and reverse mortgages. We’ve worked extensively with cash-out refinancing and help clients to lower their monthly mortgage payments.
To get started with a mortgage to buy your next home, or to refinance your existing home, please fill out our Quick Mortgage Application, or contact us direct.