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- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
Buying Down Interest Rate on Mortgage
Buying a home or refinancing your mortgage is one of the biggest financial decisions that an individual has to make in a lifetime.
When it comes to mortgages everyone wishes that they get the lowest interest rates possible which mean low monthly payments.
Generally, the interest rate that is offered to you is based on your financial situation.
However, what many people don’t know is that they can buy their interest rate from the lender they are working with to their benefit.
In this post, we will learn more about buying down interest rate on a mortgage.
Basic Overview
Buying down the interest rates is also known as points. Where one point equals one percent of the loan amount.
Every day the loan officers receive the list of interest rates with costs and credits.
This means to get some interest rates there would be a cost, while to get others you would receive a credit.
There is a baseline rate which is called a par rate meaning that there is no cost or credit. This is the rate that most loan officers will let you know as their lowest rate for the day.
You as a consumer have an option to go up or down these rates.
For example, if you are short on closing costs, you might want to bump your interest rate up by a bit to see how much credit you can get back to minimize your closing costs.
Or if you want a rate that is lower than the par rate offered to you, you have an option to buy it down.
How Does Buying Down Interest Rate on a Mortgage Work?
For the purpose of this post, we will use an example with the loan amount of $200,000. So one buys down point equals $2,000.
When you are getting a rate quote or you happen to see a rate listed online and it says one point you should know that you also have to pay $2,000 to get that rate.
Or if you see half a point that is half a percent which is $1,000. What you need to keep in mind is that when you are buying down the interest rate how low of the rate are you getting.
If the lender is quoting you a specific rate with one buy down point, you also need to ask the lender what your interest rate would be without any buy-down points and then you need to see the difference.
Most of the time when you are paying one buydown point to get a lower rate, you get a difference of about a quarter percent in your interest rate.
The more buy-down points you pay lower your interest rate would be.
When you decide to get an interest rate lower than the par rate quoted by the lender, it becomes a cost to get that interest rate and that is called buying down a rate on the mortgage.
When the loan officer gives you the loan estimate it clearly mentions under costs whether or not you are being charged buy-down points to get a particular interest rate.
Conclusion
Before you plan to buy-down your interest rate on a mortgage you need to make sure that you know the number of years you are planning to stay in that property.
This would help you to understand how much time would it take for you to recoup the buy-down points that you are paying.
If you are planning to move or sell the house within a few years, you may want to go with the interest rate without buying down the interest rate on the mortgage.
