"Buying Down" mortgage rate?

Buying down your rate = paying a certain fee in order to lower your interest rate by a certain or set amount of basis points.

It usually is expressed as a % of your total loan amount.

Example:

Your broker tells you that you qualify for 3.875% interest rate. You inquire about or are offered the opportunity at buying the rate down. In exchange for x % of the Total Loan Amount, you can lower the rate down 1/8th or to 3.75. This is just an example and your ability to buy down will vary greatly.

Your credit score, income, assets and the % of your home's value based on the amount financed are used to calculate how risky you are to loan to. This risk is expressed as an interest rate.

You have a "par," pricing for this rate, which means the broker makes no money on said rate (not optimal for them to stay in business long-term). They will add basis points (percentage points onto your rate) for things like an elevated Loan To Value, a dearth or non-existent assets, higher debt-to-income ratios, dings on your credit (previous late payments on an existing mortgage, etc).

Buying your rate down is essentially you paying $ as a part of your closing costs to bring that % rate back as close to par pricing as your lender will allow.

You just need to figure out if it's worth the one-time cash payment, or adding the $ amount of the rate buydown to your closing costs that you're financing into the loan. Figure out what it increases your house note to by financing it as an increased closing cost. Or figure out what it costs you in real dollars versus how much $ on your monthly note you'll save between what you're quoted at and what you could buy down to.

Good luck.

quote:

---

But get the price for each rate and do the math to see if it makes sense in your situation

---

This is always the right answer. Problem is that 95% or more of home buyers don't have a clue how to do that math, which is why online mortgage calculators exist.

Obviously plans change, but as of today its a house we plan on being in forever.

Thanks for the info.

I'm actually applying for a mortgage right now. The break even for me is 54 months. I plan to be there longer than that and I'm assuming that interest rates are going higher than lower. So the chance of a refinance is low.

in 54 months the interest rate has a much better chance to be lower than higher. Economy and the market are the 2 biggest drivers of higher interest rates. Our economy is roaring and has been for a number of years (don't listen to the political board). Also with the FED keeping interest rates low for years it cooked the books. People can't afford the house they want today if the rate is 6% and no ones wants to loose value on the homes they own now. If rates get above 5.5% we need to see a down turn in value to support the high rate.

quote:

---

I haven't had a person buy a rate down in years.

---

You must not have many asian customers. They love buying the rate down.

not when you show them the cost and i deal with a lot of Asians. I work for a bank so 80% of my customer's are bank customers and our Asian business owners use me to purchase homes. The have great credit and down payment i don't mind working with them at all.

Buying down used to be more popular when you could deduct that money from your income taxes. Now with the higher deduction, it isn't likely to be a factor for many people.

yea i did but between 8-5 every day i take everything way to serious. you work for a broker/lender?

seller is maxed at 3% of sales price on conventional deals. No max on FHA products.