Have you heard the term “buying down an interest rate”? This is a common phrase in home loan applications, especially when working with a bank or mortgage broker. You can buy down your interest rate by asking for a series of different rates and associated costs. This is a common practice in the mortgage industry and can save you money both on the front-end and the backend depending on how you set it up.
If you pay mortgage discount points at closing, you can bring your interest rate down to a lower level and save money every month on your mortgage payment, ultimately saving a lot of money over the life of the loan.
Basically, if your lender gives you a specific rate you can ask what it would take to get a lower rate and that may mean buying down the rate with points, more upfront costs, or higher closing costs. Remember, you might have to pay more now, but in the long run, you’ll pay a lot less.
Is buying down your rate a good idea?
You have to weigh the costs. Does it make sense to spend more money now if you will save money over the life of the loan? Understanding your rate sheet can help you make a better-informed decision. Most mortgage programs have a system where you can pay a certain amount for a specific change in an interest rate. For instance. If your interest rate is at 5% but you would like a 4% interest rate, you may need to buy down that rate by paying a specified amount. This can also be considered mortgage discount points. Always ask your lender if there are options to buy down the rate and get a better interest in the life of the loan.
As the interest rate goes lower, the price to buy down goes higher. This sounds a little disproportionate, but it does make sense because it gets increasingly expensive to go far below the typical market rates. This might be a lot more upfront costs, but it could literally save you tens of thousands of dollars. You need to figure out what works for your situation. You don’t necessarily have to chase a certain rate but simply run the numbers and do the math to see what works for you both now and with your monthly mortgage payment.
Try not to set your heart on specific rates. Ask what the lender is offering and compare mortgage payments at different rates to consider the costs for buying down to those rates. It may not make sense for you and you might consider selling in the future or refinancing at a later time, in which case buying down the rate now might not be a priority.
The point is to talk to your lender or your mortgage officer about your options. Most people don’t even realize they have different options when it comes to tailoring a home loan that works for them both now and in the future. This is exactly what I do. I don’t want it to simply be the best loan right now, but I wanted to be the best loan five years from now as well. Whether you are a first-time buyer, self-employed borrower, or looking to refinance, there is a multitude of options that work for each individual borrower. No two borrowers are the same and I want to tailor a plan that works for you and your financial situation.