According to a CNBC report published on January 7th, 2019, buydown mortgages may begin to increase as mortgage interest rates in the U.S. go up. Although it’s been an uncommon buying strategy over the last few years, buydown mortgages could make a comeback in a trickier homebuying climate.
Defining Buydown Mortgages
A buydown mortgage refers to a type of mortgage where a homebuyer pays money upfront to lower their mortgage interest rate over the life of the loan. This is sometimes known as buying mortgage points or buying down the rate. Anyone involved in the buying or selling process can buy mortgage points, but it’s most commonly done by the buyer to reduce their financial burden.
Each mortgage lender has their own rates for points, with each point representing a different percentage change to the offered interest rate. Some lenders may charge a fixed rate for points, though they often charge a certain percentage of the total loan value. Paying for one point may reduce your rate by any percentage, with the normal being around 0.15% to 0.5%.
For example, on a $200,000 mortgage, you could pay $2,000 to reduce your interest rate 0.25%. If 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.
When buying multiple points to lower your mortgage interest rate, each point typically lowers the rate progressively less. For example, in the scenario above, buying a second point may only lower your interest rate an additional 0.125%, saving you much less in interest compared to purchasing the first point.
Buydown Mortgages Will Likely Become More Popular
The CNBC report mentions predictions by TransUnion, one of three major U.S. credit bureaus. They predict that mortgage rates will rise in 2019, which could result in more people buying points to lower their interest rate.
Buydown mortgages are not currently on the rise, as mortgage rates remain relatively low. But, with the predictions of higher mortgage rates in the future, buydown mortgages may begin to grow in popularity as buyers feel the strain.
The Impact of Buydown Mortgages on Consumers
Buydown mortgages can reduce the long-term cost of buying a home. However, the short-term cost can outweigh the long-term benefits if circumstances aren’t right. For instance, if a buyer will not be in the home long enough to break even on the initial cost of the mortgage points, there will not be any benefit. Typically, buyers should expect to break even after 3 – 6 years.
Mortgage points have a greater impact on longer-term loans. A homebuyer with a 30-year mortgage who pays points to buydown the interest rate can reduce the cost of the loan by thousands of dollars over the life of the loan.
Mortgage Interest Rate Trends and Predictions
Mortgage rates appear to be on the rise for the first time in decades. TransUnion’s predictions were partially based on the Fed’s previous decision to issue continued rate increases throughout 2019, which was ultimately put on hold until later in the year. However, the Fed already increased interest rates in 2018, which caused some effect on mortgage rates.
As the Fed increases interest rates, mortgage rates will naturally rise to compensate for the higher cost of borrowing money. If Fed interest rates continue to rise in 2019 and again in 2020, mortgage rates are likely to increase as well.
As mortgage rates increase, the cost of buying a home becomes more expensive overall. By buying down the mortgage for a lower interest rate, homebuyers, as well as homeowners refinancing their home, can reduce the overall cost of homeownership over the long-term.
Marimark Mortgage is based in Tampa, Florida and serves the mortgage needs of homebuyers, homeowners, and investors 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 with HARP refinancing to lower their monthly mortgage payments.