Buying Down Your Interest Rate

Many borrowers and prospective homeowners out there are looking for the lowest possible interest rate, even if it means pulling money out of their own pocket at the time of financing.

Though most borrowers usually opt for a higher mortgage rate to avoid paying closing costs when buying a home or refinancing, some savvy homeowners will pay the one-time fees and take a lower interest rate to save money over the long term.

Of course, this strategy only really makes sense if you plan to stay with the mortgage for a long period of time, as associated savings aren’t usually realized for several years.

Buying Down the Rate

If you’re working with a bank or mortgage broker, you can easily buy down your interest rate by asking for a series of different rates and associated costs. This is known as “buying down the rate,” and is common practice in the mortgage industry.

You may have seen mortgage advertisements for “no point mortgages” or “zero point mortgages,” and may be quick to jump on them. And though these no cost loans could serve you well to leverage your money, for borrowers who have decent asset reserves and plan to pay off their loan, buying down the interest rate may be a better idea.

Should you buy down your rate?

Deciding whether or not to buy down your interest rate can be tricky, but if you get your hands on a rate sheet, you can make the decision quite easily. Most mortgage programs have a system where you’ll pay a certain amount in “fee” for a specified change in interest rate.

For example, if your interest rate at the par rate is 6.25%, but you’d like a rate of 6%, you’ll need to buy down that rate by paying mortgage discount points.

Mortgage discount points are a form of prepaid interest that can lower your mortgage rate if you so desire.

A rate sheet may look something like this:

Interest Rate – Price
6.375% – (0.375)
6.25% – 0.00
6.125% – 0.25
6.00% – 0.50
5.875% – 1.00
5.75% – 1.75

Each rate has a corresponding price, which is simply displayed as a percentage of the loan amount. In the example above, the par rate would be 6.25%, as it has an associated price of zero.

If you look at the buy-down ratio for each rate, it isn’t exactly a perfect science. Usually as the interest rate goes lower, the price goes higher, often disproportionately. That’s why it’s important to decide on a pricing threshold where it makes sense to buy it down.

For some reason, homeowners seem to have a certain interest rate in mind that they must have. It’s foolish to go after a certain rate, especially when the cost associated may eclipse the actual savings you’d accrue over time with the lower rate.

That’s why it is important to compare your mortgage payment at different rates and the associated costs for buying down those rates.

Note: There may be a limit to how many mortgage points you can buy based on the new QM rules, along with how low the lender is willing to go.  It also gets to a point where it no longer makes sense to keep going lower because the cost becomes excessive.

Look at a comparison of interest-only mortgage payments on a $500,000 loan amount

- Interest rate of 6.25% with a price of 0.00 Monthly payment: $2604.17
– Interest rate of 5.875% with a price of 1.00 Monthly payment: $2447.92

Total monthly savings: $156.25
Total cost to buy down rate to 5.875%: $5,000.00

It would take roughly 32 months to realize the savings associated with the lower rate of 5.875%. It may be worth it if you plan on staying in your home over a long period of time, but if not, it might be wise to stick with a slightly higher interest rate at no cost.

Do the math to figure out which rate makes the best sense to buy down based on your long term plan with the associated property. Buying down your interest rate can be a great decision, but also a foolish one if you pick up and go after a year or less.

And don’t fixate yourself on an exact interest rate. It simply isn’t worth it sometimes, especially when the price doubles to drop the interest rate a mere eighth or quarter percentage point.

Read more: How to pay off the mortgage early.

Compare Today’s Mortgage Rates


11 Comments

  1. Lucius July 16, 2013 at 4:17 pm -

    I asked about buying down my rate, and was shocked that it would cost one mortgage point (1% of my loan amount) to lower my rate just .125%. That’s a complete joke. Why would I do that?

  2. Patrick July 22, 2013 at 1:12 pm -

    I’m not seeing the value in buying down my interest rate. The lender is charging about a half point for a .125% reduction to the rate. I’d rather just take the higher rate and pay a little more to principal each month. This would also mean my home would be free and clear a lot faster.

  3. Colin Robertson July 26, 2013 at 12:53 pm -

    It depends where your starting point is, and how much you want to buy your rate down. For example, if the lender offers you an interest rate close to the lowest of what’s available, buydowns will be very expensive. If you’re somewhere in the middle of what’s available, a buydown may be much more reasonable.

    So a buydown of .125% may cost anywhere from a half point to a full point, depending on your starting point. This is why it’s key to compare different buydowns.

  4. Sebastien July 31, 2013 at 8:22 pm -

    I’m finding it very, very expensive to buy down my 30-year fixed rate. Nearly 2 points to lower my interest rate .25%. No thanks. I’ll just make extra payments to principal and save interest that way.

  5. Faustino August 3, 2013 at 4:49 am -

    If it’s your forever home, buy it down. If it’s a starter home, you probably won’t get your money back.

  6. Kristen September 9, 2013 at 1:25 am -

    I’m okay with buying down my rate. I don’t invest and the money just sits in an account earning less than 1%. Might as well take a lower rate that will save my family money in just a few short years.

  7. Elliot S. September 9, 2013 at 9:05 am -

    Don’t buy down when rates are already low. Put your money elsewhere and get a better rate of return.

  8. Gus E. November 2, 2013 at 8:12 pm -

    I just bought my 30-year fixed rate down to below 4% and it only cost me a bit over $1000 plus other closing costs. I’m planning on staying for a while, and I’ll break even in a few short years. Worth it for me.

  9. Colin Robertson November 3, 2013 at 12:07 pm -

    To each their own. Do the math and look far into the future to ensure you’ll get your money back. People move and refinance a lot more than they probably realize, so buying down isn’t always rewarding.

  10. valerie January 7, 2014 at 10:05 pm -

    I’m confused. Our builder supposedly bought down our rate from 4.25 to 3.99, but now our lender is trying to charge us 1 point because our credit score is less than 720. Does that make sense? Our sales rep “promised” us 3.99 so we signed the purchase agreement and put down $10,000. Now our lender says we have to pay $2835 to get the 3.99%, that it is a credit score adjustment fee. Have you ever heard of that?

  11. Colin Robertson January 8, 2014 at 11:16 am -

    It could be that your credit score wasn’t as high as they originally anticipated, and the unexpected adjustment translated to a higher interest rate, or having to pay for the originally quoted rate. And yes, adjustments for credit score are very normal, especially if under 720.

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