Buying Down Your Interest Rate

When you’re shopping for a mortgage, you might come across the option to “buy down” points at closing. But what does this mean, and is it a good idea for you? In this blog, we’ll explore the concept of buying down points at closing and help you determine whether it’s the right choice for your situation.

First, let’s define what we mean by “points.” Points are a form of prepaid interest that you can pay when you close on a mortgage. Each point is equal to 1% of the total loan amount. So, if you’re taking out a $200,000 mortgage and you decide to pay one point, you’ll be paying an upfront fee of $2,000.

Now, when you buy down points, you’re essentially paying more upfront in exchange for a lower interest rate on your mortgage. For example, let’s say you’re offered a 30-year fixed-rate mortgage with an interest rate of 4.5% and no points. If you decide to buy down two points, you might be able to get an interest rate of 4.0% instead. This means you’ll be paying less in interest over the life of the loan, but you’ll also be paying more upfront.

So, why might someone want to buy down points at closing? The main reason is to save money over the long term. If you plan on staying in your home for a long time, paying more upfront to get a lower interest rate can make sense. This is because the interest you pay on your mortgage adds up over time, so even a small reduction in your interest rate can save you thousands of dollars over the life of the loan.

Another reason to consider buying down points is if you want to lower your monthly mortgage payments. By getting a lower interest rate, your monthly payments will be lower as well. This can make your mortgage more affordable, which is especially important if you’re on a tight budget.

However, there are some downsides to buying down points as well. First and foremost, it requires you to have more cash upfront. If you’re already struggling to come up with the money for a down payment, buying down points might not be a viable option for you. Additionally, you’ll need to stay in your home for a certain amount of time in order to recoup the upfront costs of buying down points. If you end up selling your home before that time period is up, you might not see the savings you were hoping for.

So, is buying down points at closing the right choice for you? It really depends on your individual situation. If you plan on staying in your home for a long time and have the cash upfront to pay for points, it could be a smart financial move. However, if you’re not sure how long you’ll be staying in your home or don’t have the extra cash, it might not make sense for you.

You can also buy down your points if the appraisal comes back high through a simple addendum that increases the sale price.  Then at closing, the seller credits you back the amount to be used towards your closing costs or to buy down your rate.

Before making any decisions, it’s always a good idea to talk to a financial advisor or mortgage professional who can help you weigh the pros and cons and determine whether buying down points is the right choice for you.