Rising interest rates can be a major concern if you’re shopping for a new
home. A higher rate reduces your buying power and increases the home’s
cost by thousands of dollars over the course of the loan. One option to avoid
this is to “buy down” your loan rate. This allows you to purchase your home
at a more attractive rate.
A rate buydown is when you pay an upfront fee in exchange for a lower
interest rate. This increases your closing costs and for every 1% of the
purchase price you pay in points, your mortgage interest rate is reduced.
Buying a lower interest rate may be a good strategy for a home you intend
to keep for a long time, thus making up the difference over the life of the
There are a couple options for a rate buydown. The first is a simple
payment of increased closing costs up front in exchange for a lower
interest rate. The buydown lasts for as long as you have the loan and is
requested by the buyer.
The second is a temporary buydown often initiated by a homebuilder or
lender to incentivize a purchase. In this case, the buydown is for a set
period, two or three years, and then the rate will return to the higher rate if
the borrower does not refinance.
This strategy is a good one for a starter home or if one believes the interest rates will be lower in a few years.
Utilizing a buydown as part of your loan origination can be a smart way to
save money and maximize your purchasing power. It’s important to
recognize the breakeven point, however, so that you know when you have
started gaining money on the plan.