Buying down your rate could save you thousands!: UPDATE 3

Now is a great time to buy and sell, as mentioned in our previous Keynote titled “Market Update: Why now is still a good time to buy and sell!” 

In the past several years, we’ve seen interest rates at a historical low and now that they’re rising, naturally, our prospects/buyers have reservations- we understand! If paying for your home in cash, interest rates have less impact on your decision-making but if you’re financing, this might make or break your decision. Just know, if you have good credit and some cash available to you, you have options! One of these options is to buy down your rate, temporarily or permanently. 

Toby Lane, Branch Manager at New American Funding, Atlanta, GA provided us the below information regarding what a buy-down is and how it can benefit you.

“A temporary buy-down is where we buy down the rate, subsequently making the monthly payment lower, for a set period before the rate adjusts back to the note rate for the remainder of the loan. The money put towards the buy-down is collected at closing and put into an escrow account and is paid to us, the lender, to make up the difference. 

The monthly payments reflect the rate at the time, so the payments are lower during the first year, two years, or three years, depending on the buy-down timeframe, than they are for the remaining years on the loan. We still must collect the difference in the lower payments for those buy-down years. 

For example, A 1-0 buy down would buy down the rate of 1% for the first year only, and then the client would have their regular rate for years 2-30. On a 2-1 buy down the client would have a 3.99% rate the first year, a 4.99% rate the second year, and a 5.99% rate for years 3-30.

A permanent buy-down can be paid by the borrower and is just accomplished by paying discount points.  This option is most commonly done by the borrower, but occasionally we see the seller assist with this.” - Toby

Permanent buy-downs also help lower your payments, and instead of saving you money for the first few years, it can save you money over the life of the loan. Of course, the cost of a permanent buy-down is more than a temporary buy-down but can save you a significant amount more in the long run. This may be the better option for you if you intend to own the home for more than a year or two. 

Check out our breakdown below and see how a permanent buy-down can save you up to $180/month on your monthly payments and up to $65,000 over the life of your 30-year loan. Keep in mind, that this information may vary based on interest rates at the time of your application, loan type, and your individual circumstances, including credit score and credit history. 

FHA/VA 30 YEAR PERMANENT BUY-DOWN EXAMPLE  

Home Price: $300,000

Current avg interest rate: 5.75% = $1,751

COST TO BUY-DOWN 2 POINTS: $6,000

Rate after buy down: 4.99% = $1,609 monthly payment 

SAVINGS: $142 per month or $1,704 annually, which is $51,120 over the life of a 30 year mortgage!

Home Price: $350,000

Current avg interest rate: 5.75% = $2,043 monthly payment

COST TO BUY-DOWN 2 POINTS: $7,500

Rate after buy down: 4.99% = $1,877 monthly payment

SAVINGS: $166 per month or $1,992 annually, which is $59,760 over the life of a 30 year mortgage

Home Price: $400,000 

Current avg interest rate: 5.75% = $2,334 monthly payment

COST TO BUY-DOWN 2 POINTS: $8000

Rate after buy down: 4.99% = $2,145 monthly payment

SAVINGS: $189 per month or $2,268 annually, which is $68,040 over the life of a 30 year mortgage

If you’re looking to make your monthly payment more affordable while interest rates are higher, consider buying down your interest rate, temporarily or permanently, or refinancing in 6 months to a year.  Keep in mind, that eligibility may vary based on the individual’s circumstance and the lender they’re using. We highly recommend you chat with a lender as early in the home-buying process as possible. 

For more information on buying down your interest rate, click here. 

Keep a lookout for our next keynote (blog), where we discuss refinancing and how this may be an option for you.