How Much Does It Cost to Buy Down a Mortgage Rate?

Buying a house is no easy feat, and figuring out what to do about a mortgage can complicate matters. Essentially, when you take out a mortgage to buy a home, you agree to pay interest on the loan for the privilege of borrowing money. As the housing market fluctuates along with mortgage rates, you want to ensure your monthly payments will be manageable. When you get a mortgage, it might seem like you are locked in at a specific interest rate. However, you can talk to your trusted real estate team to find out how much house you can actually afford and learn about all your options. One option for getting a better rate is through what’s known as a buydown mortgage rate, which can actually help lower your monthly payments and give you some control over your interest rate. A mortgage rate buydown can be a great option for those who plan to stay in their home for a longer period of time so that their efforts pay off.

The Basics of Mortgage Buydown & Mortgage Points

A mortgage buydown is a way to obtain a lower interest rate by paying what are known as discount points. Also known as discount points or prepaid interest points, mortgage points are a one-time fee you pay upfront at closing. When you pay these discount points, you end up with a lower interest rate for a set period of the loan term. As a homebuyer, you can negotiate the buydown interest rate with your lender by offering to pay a set number of points upfront, which would result in a lower interest rate. This option allows you to enjoy a more affordable mortgage either for a set number of years or for the duration of the loan.

 Because mortgage rates are on the rise, a buydown mortgage rate might give you more financial flexibility and stability when purchasing your next home. A loan without any mortgage points applied is often referred to as a zero-point loan. Work with your real estate broker to determine which loan option works best for you, and then review current mortgage rates to determine if the buydown approach would help you save in the long run. Since a buydown mortgage rate is a negotiated process, it can be arranged in a variety of ways. A mortgage buydown could also serve you better financially than other options like an adjustable-rate mortgage.   

How Much Does a Mortgage Buydown Cost?

The cost to buy down the interest rate for a mortgage will depend entirely on the amount the buyer intends to take out on the loan. The amount of the loan will determine the cost for each mortgage point, which is equivalent to 1% of the loan amount. For example, your mortgage lender could offer you as the borrower to reduce your interest rate by .25% in exchange for a mortgage point. If you are obtaining a mortgage for $500,000 and the current interest rate is set at 5%, you would end up paying $5,000 would lower your interest rate to 4.75%. Before considering a mortgage buydown, you want to make sure you have enough in savings to afford the down payment and closing costs, and still have enough to cover potential mortgage points.

Different Types of Mortgage Buydowns

A mortgage buydown is a negotiated process, and mortgage lenders can work with various structures, including temporary and permanent interest buydowns. The difference between the standard mortgage rate and the lowered rate will be paid to the lender at closing through mortgage points. Some buydown mortgage rates expire, so it’s important to understand what type of mortgage buydown you are working with and understand how this will impact your monthly payments.

Temporary Buydown Mortgage

The most common examples of a temporary buydown mortgage include the 3-2-1 buydown and the 2-1 buydown. A 3-2-1 buydown makes it possible for the buyer to pay less interest on the loan during the first three years. Mortgage points paid upfront can reduce your interest rate by 1% for 3 years after obtaining the loan. A 2-1 buydown allows buyers to get a discounted interest rate, though this type only covers the first 2 years of the loan. With a 2-1 buydown, buyers can expect an interest rate 2% lower during the first year and 1% lower in the final year. Both types of temporary buydown mortgages here can help you as the buyer save thousands of dollars in interest.

Permanent Buydown Mortgage

A permanent buydown mortgage refers to a situation where the buyer purchases enough mortgage points so that the interest rate can be reduced for the life of the loan. With this type of buydown loan, the buyer will end up paying a larger amount upfront that allows the interest rate and mortgage payments to stay the same for the duration of the loan. With a permanent buydown mortgage or any type of mortgage, it is important that you review your financial portfolio and determine what monthly payment you are comfortable with and how that could impact your monthly and yearly savings.

Need Help Calculating Your Mortgage?

To help you determine whether a mortgage rate buydown is worth your while, you will want to calculate how much time it will take you to recover the cost of the mortgage points compared with your monthly savings. This will help you determine the break-even point of how many months or years it would take to break even on the savings you used to spend on mortgage points. Part of this will require you to determine a comfortable monthly mortgage payment that works for you.

Try Our Mortgage Calculator

Try the helpful mortgage calculator from Florida Realty Marketplace to help determine how much house you can afford. All you will need is the property price, your anticipated down payment, the length of the mortgage, and the estimated annual interest rate. You can also input these 4 data points into the calculator to calculate estimated monthly payments on your next home.