Buying Down Your Interest Rate

buy down

Some existing and prospective homeowners out there are fixated on obtaining the lowest possible mortgage 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 a mortgage, this group of savvy homeowners will pay the one-time fees in exchange for 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 decent chunk of time, as associated savings aren’t usually realized for several years.

Buying Down Your Mortgage Rate

  • When you apply for a home loan
  • You will be given the opportunity to buy down your rate
  • This requires paying mortgage discount points
  • Which are a form of prepaid interest

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 a common practice in the mortgage industry.

Today's Rates

In short, if you pay mortgage discount points at closing, aside from any commissions and any other lender fees, you can bring your interest rate down to a lower level. And then save money each month via a lower mortgage payment.

For example, if the bank or broker says you qualify for a 30-year fixed at 4.25% with no points, but you want a rate of say 3.875%, you can ask them what it would take to get the desired rate.

They may come back and tell you that it will cost one mortgage point to buy down the rate, at which point you’ll need to decide if the monthly savings support the upfront cost.

If that mortgage point sets you back $2,000 at closing, you need to know how long it will take to recoup the cost, and if you will still have your mortgage at that time.

Should you buy down your rate?

  • This is a very important question
  • You should know the answer to
  • Based on the cost to buy down the rate
  • And how long you plan to keep the loan

You may have seen mortgage advertisements for “no point mortgages” or “zero point mortgages,” and might 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 loans, buying down the interest rate may be a better idea.

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 a specified amount (or fraction thereof) of mortgage discount points.

As noted, mortgage discount points are a form of prepaid interest that can lower your mortgage rate if you so desire. You’re essentially paying the interest upfront as opposed to monthly via higher principal and interest payments.

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.

How much does 1 point lower your interest rate?

  • There isn’t one specific ratio
  • And it can vary by bank/lender
  • So you really need to find the sweet spot
  • Where the rate buydown is justified by the cost

If you look at the buy-down ratio for each rate, it isn’t exactly a perfect science. Well, at least not to us non-bankers.

Usually as the interest rate goes lower, the price to buy down goes higher, often disproportionately. This actually makes sense because it gets increasingly expensive to go well below typical market rates.

As you can see, someone could pay one point for a rate of 5.875%, but be asked to pay nearly double that to get the rate down another eighth of a percent to 5.75%. That probably wouldn’t make much sense.

The same is true when moving below key levels like from 6% to 5.875%. Lenders probably know you want that lower rate because it just looks and feels so much lower. So watch out for a big bump in price at these psychological levels.

Decide What Works Based on Math

  • Don’t chase a certain rate
  • Like 4.99% or some other emotional number
  • Run the numbers and do the math with a calculator
  • To see what exact buydown (if any) makes the most sense

This is why it’s important to decide on a pricing threshold where it makes sense to buy it down instead of chasing a certain rate.

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

Even if you have your heart set on X rate, you may want to see what the lender is offering, then compare your mortgage payment at different rates and consider the associated costs for buying down to 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.

Keep It to Yourself

  • Don’t talk about paying points
  • When you first start shopping for your home loan
  • To ensure you’re getting the best offers
  • Only once you’ve negotiated should you ask about buydowns

One last tip before you go and shop rates. If you are interested in paying points, it might be in your best interest (literally) to keep that to yourself, at least initially.

If you tell the loan officer or mortgage broker that you’re willing to pay points, they may think it’s okay to offer a slightly higher rate and simply highlight the post-buydown rate.

Instead, search and negotiate for the lowest rate possible, then once you’ve exhausted yourself and the salesperson, ask what it’ll cost to go lower. This may be the most effective way to truly see how low you can go.

In summary, 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. Or if you quickly refinance.

And remember, don’t focus 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.



40 Comments

  1. Colin Robertson October 26, 2018 at 7:45 am -

    Tyler,

    A lender credit would actually increase your rate. Options to lower the rate even more would be potentially lowering your LTV via a larger down payment, improving credit scores if not already perfect, or even shopping around with other lenders that can offer a lower rate.

  2. Tyler October 25, 2018 at 10:50 pm -

    We have been in escrow for about 3 months now. When we obtained a final loan approval, our interest rate was low. Now that the interest rates have gone up and we are 40 days prior to escrow closing, we were told that we need to lock in a rate. The rate now is 5.375%, we are buying down the interest rate for $3,292.00 to bring the interest rate down to 4.375%. Is there anyway we can buy the interest rate down even more? Can we ask the lender for a lender credit? What are our other options? The home is $395,000 and we obtained a seller credit from the builder for $8,000. we put down $3000 for the deposit and need an additional $8000 cash to close. What else can we do to bring down the interest rate ?

  3. Colin Robertson November 29, 2017 at 9:30 am -

    Jeff,

    Most mortgages are calculated monthly so it probably won’t yield any monetary benefit to pay a half of it early. You can ask your servicer to be sure but I doubt it will save any money. And it’s always important to ensure they’ll accept split payments to begin with.

  4. Jeff November 28, 2017 at 9:20 pm -

    Is it a good idea to split payment in half and pay two payments a month. Will this pay of the house faster and will more go to principal?

  5. Colin Robertson April 19, 2017 at 9:43 am -

    Harvey,

    To determine that you would need to use a calculator to see how much you’ll save each month at the lower rate and if it’s more than $5,000, it could be worthwhile. Also factor in principal pay down over that time. Alternatively, you could look at ARMs if you know for sure you’re selling in 5-7 years, though plans often change…

  6. Harvey Gregoire April 19, 2017 at 4:50 am -

    I was asked to buy down my rate is 4.375 for $5000 we can buy down to 4.08. Is this worth it? We plan on moving in 5 to 7 years

  7. Colin Robertson March 29, 2017 at 1:36 pm -

    Jackie,

    That’s a fairly long breakeven period, but if it’s a forever home it could make sense. Have you looked at other rates, such as 4.25%? Is there a happy medium? It’s also possible to pay extra each month and save money on interest that way.

  8. Jackie March 29, 2017 at 11:34 am -

    Hi,

    We’re working on Refi now. Our rate will be 4.375, or we have an option of buying down to 4.125 with $9,000. (That can be observed in to the loan). We’ll save $50/mo in 30 years, but it will take 10 years to get even. We don’t have a set plan for moving to anywhere else. We may or we may not. Should we consider buying it down?

  9. Maria February 23, 2017 at 3:24 pm -

    I got my house Aug. 2009, with an interest rate of 4.65, I did a buy down to 0.125% and it cost me 34,000. And it was worth it. My payments were 759.00 then a year later went down to 525.00. If I didn’t buy it down, my payments would gave been alot higher, like 1200.00 a month.I went through the NACA Program. That is NACA.COM

  10. Colin Robertson February 5, 2017 at 11:11 am -

    Amy,

    Good stuff! It’s important to consider how long you’ll actually keep the mortgage, as opposed to jumping on the lowest rate, as you said.

  11. Amy February 1, 2017 at 10:05 pm -

    We are buying our first home so this was all new to me. I did some calculating between rates and their points fees, etc. We decided on 3.25% because it saved us the most. It’s funny, paying about 2k more to lower it to 3.15% ended up with us losing money were we to stay for 30 years. I guess that’s for the people who don’t do the math and just jump on lowest rate no matter what?

    Anyway, after deciding on 3.25% with $2550 in points and origination fees I realized that we only plan to stay about 5 years and then sell (hoping to make money, we got a deal and are remodeling ourselves) so I needed an amortization chart/calculator to see if we even wanted to lower the 3.75% “free” rate.

    And the answer was no, we do not. We can keep $2550 in our hot little hands to go into the remodel because at 5 years we would have just gotten our money back plus about $550. We plan to save on interest by just making a double payment so we can control our future savings that way and I’m good with that ;)

  12. Bill November 19, 2016 at 9:13 am -

    Have the broker use the commission they earn from the lender to reduce the rate. Buying down should have to cost you … it should cost them to earn your business.

  13. Colin Robertson June 24, 2016 at 4:23 pm -

    Christina,

    A 15-year loan can certainly save a ton of interest vs. a 30-year, and it’ll obviously be paid off in half the time. You also get a lower interest rate as you mentioned. Buying it down more is your call, but would be beneficial as long as you keep the mortgage past the breakeven point where paying for it upfront is recaptured via enough lower monthly payments. But if you also make extra payments that would lessen the value of the bought down rate because you wouldn’t be paying as much interest over the life of the loan, if that makes sense.

  14. Christina June 22, 2016 at 9:12 am -

    Colin – I just started my refi to get lower rate (we’re at 4.675% now) and shorten our loan (28 yrs left now). We are in a high tax bracket and that higher rate didnt seem to make a difference to our bracket, so I’d like a lower rate on our home.

    I have to choose one of below:

    30 year – 4.0
    20 year – 4.0
    15 year – 3.375
    10 year – 3.5

    15 years looks great, and we are considering buying down another 1/2- to 1 point if possible, and just pay cash at the time of closing for this. Is this wise, and does this really save $ in the long haul? I’d like to retire in 10 years so I plan on making extra principle payments in order to do so.

    Thanks

  15. Colin Robertson February 17, 2016 at 9:28 am -

    Sonny,

    Makes sense if your goal is to pay off the mortgage and save money on interest, yes. Just mind stretching yourself too thin in the process if cash on hand is an issue.

  16. Sonny February 17, 2016 at 12:11 am -

    We are buying a house: $209,900 and plan on putting 20% down. Interest rate is 4%. Lender told us we can reduce to 3.25% for an extra $4,000 which would save us $72/month on payments. That would take 4-1/2 years to recoup. We plan on staying in home 5-10 years. Sound like a good plan?

  17. Colin Robertson January 9, 2016 at 7:49 pm -

    Joan,

    Find a break-even calculator to see when that $750 cost would be recouped. Using simple math you could take $750 and divide it by the difference between both monthly payments (4.375% vs. 4.25%) to see how many months it would take to be in the black. But a lower rate also technically builds equity faster (more principal in each payment), then there are tax write-offs if you want to get super specific. Generally if you stay a long time it can make sense to pay for a lower rate, but it also depends if you want your money paying down the mortgage or used elsewhere.

  18. Joan January 9, 2016 at 10:50 am -

    Colin,
    We are refinancing our house and the loan is for 285K. We have a 4.35% interest rate and we can buy it down to 4.25% for $750. We are planning on staying in this house for decades. How do I figure out long-term is this percent is worth it? I’m so lost.
    Thank you,
    Joan

  19. Colin Robertson December 9, 2015 at 4:29 pm -

    Julia,

    If it’s the same program most rate lock policies will use pricing from the day you originally locked. But I’ve seen some that take the higher of current market pricing or original pricing. Do they have a rate lock policy? Have you read it? Did your rep explain their policy?

  20. Julia December 9, 2015 at 11:54 am -

    We have locked our rate at 4%, and few days later asked what it would cost us to buy rate down. Once we got several buy down options we agreed to buy it down to 3.75 which would cost us $752 based on the ALCI that was emailed from the rep. Several days later we called our rep and asked to change our rate to 3.75%, he said that now the cost would be over $2,600 because rates went up as of today….How could it be, doesn’t he have to use rate sheet of the original day we locked, or the day that we are making a rate change?

  21. Colin Robertson November 9, 2015 at 5:02 pm -

    Ryan,

    That could be a benefit initially but then you’d pay less interest each year (due to the lower rate) and wouldn’t be able to write-off as much in subsequent years.

  22. Colin Robertson November 9, 2015 at 4:37 pm -

    Mcgovern,

    Lenders will extend locks for free if it’s their fault or out of the borrower’s hands, but there’s no guarantee. They might be able to allow a buydown but still charge the lock extension fee on top of it.

  23. Mcgovern November 3, 2015 at 4:13 am -

    Question- So my rate will expire on my closing date and i highly doubt that I’ll be able to close on the loan because of title issues. I’ve asked my LO to get a better rate and he says my only option is to extend the rate which the lender charges a hefty $800 fee to extend. I’m doing a Renovation loan on my first property and wanted to go from a 4.5 to 4.2. Why wouldn’t they lower my rate or allow me to buy it down if it’s not my fault that we’re not able to close on the expiration date? Can you negotiate a lower rate if the reason for not closing on time is not your fault?

  24. Ryan November 2, 2015 at 4:10 pm -

    Colin- does it make more sense to buy down your mortgage if you’re in a higher tax bracket? Since points are deductible, if you’re in the 33% tax bracket, wouldn’t you get a third of your points back? It seems like it would be worth it in that case…no?

  25. Andrea Janine August 29, 2015 at 8:22 am -

    We are refinancing our house and pulling out some of the equity to pay off a large credit card & to do home repairs. We locked in an interest rate of 3.5/.875/1.0 but then a few days later, it was changed to 3.65/0/1.0 without the bank telling us. The bank is researching why the change was made.

    My question: is that change better or worse for us? We’ve owned our home for four years and will stay in it at least ten more years. Also, we are reinvesting the equity into the house.

  26. Colin Robertson April 2, 2015 at 12:23 pm -

    Kim,

    The cost of a point is based on the loan amount, not the purchase price, since purchase price isn’t relevant with down payments highly variable. Probably best to ask the lender what a specific buydown at different amounts (1 pt, 1.5 pts, or 2 pts, etc.) would equate to as opposed to relying on a rule of thumb, then compare monthly payments.

  27. Kim April 1, 2015 at 10:27 pm -

    Is the cost to buy a point based on the cost of the house or is it based on the loan amount after the down payment?

    For example. If the home cost is $450,000, but the loan amount is $408,000 after the down payment, and it costs 1% of the cost of the home to buy a point, is that 1% of the $450,000? Or is it 1% of the $408,000?

    A friend who used to be a mortgage underwriter said that buying points lowers the rate, but it only lowers the payment by $7 per thousand spent buying the point.

    So, to buy 1 point on a $400,000 home for 1% would be $4000. It would only lower your payment $28 a month.
    ($7 x 4)

    Does that sound true?

  28. Colin Robertson March 23, 2015 at 5:32 pm -

    Tiler,

    May want to ask for a deeper explanation and/or ask your accountant/tax advisor.

  29. Tiler D March 23, 2015 at 1:58 pm -

    Looking at “buying down” but the bank says that will not be tax deductible? This is what they said
    ” I spoke with our Loan Servicing Department and confirmed that this fee is charged as a buy down fee and not as discount points so it is not reported to the IRS.”

  30. 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.

  31. 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?

  32. 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.

  33. 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.

  34. 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.

  35. 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.

  36. 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.

  37. 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.

  38. 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.

  39. 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.

  40. 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?

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