When financing a home, there are a host of costs to keep in mind. Two of these costs are the points you may pay on your mortgage, and the interest rate.
In most cases, it’s possible to lower the interest rate over the term of your mortgage by paying a little more upfront in the form of points. As a result of lowering your interest rate, you can save a great deal of money.
What is Buying Down a Mortgage Rate?
To buy down a mortgage rate, borrowers pay an additional charge in the form of points (also known as “discount points”) in exchange for a lower interest rate on their mortgage.
Depending on the transaction, the lender may offer a 0.25% interest rate reduction on the first point you buy. (A point is 1% of the home’s purchase price.)
On a $200,000 mortgage, you could pay $2,000 to reduce your interest rate .25%. If, for example, buying a point lowered your interest rate from 4.25% to 4.00%, you would save a little over $10,000 in interest on a 30-year fixed rate mortgage.
Buying More Than One Point Has Diminishing Returns
Though you may lower your interest rate .25% by buying the first point, buying a second point usually lowers your interest rate less than an additional .25%.
For example, buying a second point may only lower your interest rate an additional .125%, saving you much less in interest compared to purchasing the first point.
Lenders have different rates, so when considering whether to buy down a mortgage rate it is important to shop for the best deal. Ask a lender for their rate sheet, and compare it with other lenders to see which saves you the most money.
Is Buying Down a Mortgage Rate Worth It?
There are a lot of factors when considering whether buying down a mortgage is best for a particular borrower.
One of the biggest factors to consider is how long you will live in the home. In many cases, it takes 3-6 years to break even from buying down a mortgage rate, so unless you will stay in a home at least 5 years it’s probably not worth buying down the rate for most people.
If, on the other hand, you are moving into your dream home and do not anticipate moving for a long time, you could save a great deal of money over the course of the loan by buying down the mortgage rate.
When buying a home, it’s worth calculating the saving from buying down the mortgage rate based on how long you anticipate living in the home. You don’t want to pay more in interest than is necessary. Your mortgage broker can help you to determine whether the savings outweigh the costs based on your personal situation.
Marimark Mortgage serves the mortgage needs of borrowers in all of Florida, Virginia, and Pennsylvania.
We work with numerous lenders to provide our clients with the best mortgage to fit their needs, and specialize in conventional home mortgages, FHA, VA, USDA, refinance loans, and reverse mortgages.