Anonymous

# Should I buy down the Interest Rate?

What factors should I consider when deciding whether or not to buy down the interest rate?

How much does it cost to buy down "points" and what does it generally cost?

Thanks

Relevance

Good question! As a licensed Mortgage broker, I always tell people to try and figure out how long they intend to stay in the home. If you are looking to move in another 3-4 years, a buy down is not worth it. If this is a home you see yourself staying in for many many years, I recommend the buydown.

As for the buydown, 1 point= 1% of the loan amount. If you are doing 2 mortgages, keep in mind that the buydown is 1% of your first mortgage amount, not the total purchase price.

Usually, if you pay 1%, this will generally knock you interest rate down from.375%-.5%. On a small mortgage of 100-200k, this generally wont make a whole lot of difference in your monthyl payment. If your loan is larger, than the buydown would be more beneficial.

Some simple figures to consider... Lets say you are financing 250k. With good credit, you would qualify for a rate of 5.875%. With a buydown of 1% (\$2500), this would lower your rate to 5.5%. So at 5.875% on 250k, your monthly proncipal and interest would be around \$1479. At 5.5%, the monthly principal and interest would be around \$1419. So you would save \$60 per month. Now what you do is you take the amount of the buydown (2500) and divide it by the monthly savings (60). This will tell you that you will have to be in the house for 42 months to get your money's worth out of the buydown. Let me know if this helps out! Good Luck!

• Anonymous

To determine whether or not a buy down is a good idea compute the payment at both rates then divide the cost of the buy-down by the payment savings and divide by 12. This will tell you how long it will take to recoverr the cost of the buy down.

The rule of thumb is that if you are going to recove the cost of the buy down and save an equivalent amount in a reasonable time frame (i.e. you intend to be in the home for 10 years and you will recover the buy down costs in 3-5 years) it is probably worthwhile.

How much a buy down costs depends on w\how low you want to buy the rate down. Figure about 1 point (1% of your loan amount ) per .25 points down to a certain level, after which the cost becomes prohibitive.

I'd be happy to run these numbers for you and help you make that decision, just email me.

Source(s): 20+ years as a direct mortgage lender

Your loan officer should be willing and able to show you exactly, on paper, whether paying points would save you money, and precisely how long it would take to break even.

In most cases, it takes 3-7 years just to break even on paying points. 90% of loans don't last 7 years. You can probably see where this is going... Most of the time, it doesn't make sense, because you'll either sell or refinance before you save the money you were supposed to.

But bottom line, ask your loan officer for a projection of total cost and savings over the period you are confident you will be in the home. If he doesn't know how, find a new loan officer.

A "point" is 1% of your loan amount. So, \$2000 is one point on a \$200,000 loan.

Source(s): 10 years in mortgage banking