When seeking financing, homeowners often get fixated on a specific mortgage rate, usually something like 5.99% or a similar emotional threshold.
But buying down interest rates is more complicated than just an attractive rate or a specific number.
Homeowners really need to look at their long-term plan for the home before making the decision to buy down their interest rate. After all, buying down the interest rate is an upfront cost whose savings won’t be realized for many years to come.
Let’s look at some interest rate buydown calculations. Imagine you’re offered a par rate of 6.25% on a $500,000 loan with no discount points. But you’ve convinced yourself that you want a rate of 5.99% at a cost of one point, otherwise known as 1% of the loan amount, in this case $5,000.
If you make the interest only payment each month, you’ll save $108.84 a month if you choose to buy down the interest rate to 5.99%. But how long will it take to make up for the upfront cost of $5,000? About 46 months, or just under four years.
That’s where things get interesting. You need to decide how long you plan to stay in the home, and also how long you plan to stay in the loan.
If you sell your property or refinance your mortgage before those four years, you’ve essentially lost the buydown game. But if you stick around a bit longer, the buy down will begin to make a lot of sense.
One problem associated with a rate buydown is that many homeowners hold off on refinancing because they want to ensure they meet the savings they originally sought after. And this can lead to missed opportunities when interest rates drop and become more attractive.
Of course, much of the situation is uncontrollable because of an often unknown interest rate climate. Paying mortgage points may make a lot of sense if interest rates climb significantly in the years after you buy down your rate because you’ll likely stick with your current mortgage and see the savings through. The opposite is true in times when interest rates decline sharply.
In summary, take the time to analyze your situation to see if buying down your interest makes sense for you.