Ways to get a lower mortgage interest rate

Permanent rate buydown

A permanent rate buydown, also known as a discount point, is a fee that you pay upfront to lower your mortgage interest rate. Essentially, you’re buying down your rate for the life of your loan. One point typically costs 1% of your total loan amount and can lower your interest rate by 0.25% to 0.375%. You can also buy multiple points to lower your rate even further.

For example, let’s say you’re taking out a $300,000 mortgage with an interest rate of 4%. If you decide to buy one point, which costs $3,000, you can lower your rate to 3.75%. If you buy two points, which cost $6,000, you can lower your rate to 3.5%.

Why would you consider a permanent rate buydown?

A permanent rate buydown can make sense for borrowers who plan to stay in their home for a long time. By paying upfront to lower your rate, you can save a significant amount of money over the life of your loan. This is especially true if you’re taking out a 30-year mortgage.

For example, let’s say you’re taking out a $300,000 mortgage with a 4% interest rate and a 30-year term. Your monthly payment would be $1,432. If you decide to buy one point for $3,000 and lower your rate to 3.75%, your monthly payment would drop to $1,389. Over the life of your loan, you would save $17,280 in interest by buying one point.

Additionally, a rate buydown can make sense if you’re in a high-tax bracket. The points you pay upfront may be tax-deductible, which can lower your taxable income and save you money on your tax bill.

Are there any drawbacks to a permanent rate buydown?

While a permanent rate buydown can save you money over the life of your loan, it’s not always the best option. Here are some potential drawbacks to consider:

• It requires a large upfront payment: Buying points can be expensive, so you’ll need to have a significant amount of cash on hand to make the purchase. This may not be feasible for everyone, especially first-time homebuyers.
• It may not make sense if you’re not planning to stay in your home for long: If you’re planning to sell your home or refinance in the near future, a rate buydown may not be worth the upfront cost.
• It may not result in significant savings: Depending on the size of your mortgage and the number of points you pay, the savings may not be as significant as you expect. Be sure to do the math and consider the long-term impact on your finances before making a decision.
• It doesn’t lower other costs: While a rate buydown can lower your monthly mortgage payment, it won’t lower other costs associated with homeownership, such as property taxes, insurance, and maintenance expenses.
• It may not be the best use of your money: Depending on your financial situation, there may be other ways to invest your money that offer a better return than paying points. Be sure to weigh the pros and cons and consider your overall financial goals before making a decision.

Temporary Rate Buydowns

What is a 2/1 buydown?

A 2/1 buydown is a type of buydown mortgage where the interest rate is reduced by two percentage points in the first year and by one percentage point in the second year. After the initial two-year period, the interest rate returns to the original interest rate for the remainder of the mortgage term. For example, if you have a 30-year mortgage and you choose a 2/1 buydown, your interest rate would be reduced for the first two years, after which it would return to the original interest rate for the remaining 28 years.

How does a 2/1 buydown work?

A 2/1 buydown works by paying an upfront fee to the lender, which is used to reduce the interest rate for the first two years of the mortgage term. The upfront fee is typically calculated as a percentage of the loan amount and can vary depending on the lender and the borrower’s creditworthiness. The reduced interest rate during the buydown period results in lower monthly mortgage payments, making it easier for borrowers to qualify for the loan.

Let’s say you’re taking out a $300,000 mortgage with a 30-year term at a fixed interest rate of 5%. If you choose a 2/1 buydown, you would pay an upfront fee of $6,000 (2% of the loan amount). The interest rate for the first year of the mortgage would be reduced to 3%, resulting in a monthly mortgage payment of $1,264. The interest rate for the second year would be reduced to 4%, resulting in a monthly mortgage payment of $1,432. After the two-year buydown period, the interest rate would return to 5%, resulting in a monthly mortgage payment of $1,610 for the remaining 28 years of the mortgage term.

Is a 2/1 buydown right for you?

A 2/1 buydown may be a good option for you if you’re a first-time homebuyer or have a tight budget. The reduced interest rate during the buydown period results in lower monthly mortgage payments, making it easier for you to qualify for the loan. This can be particularly helpful if you’re stretching your budget to buy a home or if you expect your income to increase in the future.

However, it’s important to consider the upfront cost of the buydown. The upfront fee can be a significant expense, and it may not be worth it if you’re planning to sell the home or refinance the mortgage before the buydown period ends. Additionally, the reduced interest rate during the buydown period may only provide short-term relief, and you should be prepared for the higher monthly mortgage payments after the buydown period ends.

Possible ways to pay for buydowns

Using Sellers Concessions Towards Buydowns or Other Cost Reductions

In a real estate transaction, a seller’s concession is an agreement in which the seller agrees to pay a portion of the buyer’s closing costs or other expenses related to the sale of the property. These concessions can help the buyer by reducing the amount of money they need to bring to the closing table and can also make the purchase more attractive to the buyer by reducing their out-of-pocket expenses.

Some common types of seller’s concessions include:

1. Closing cost assistance: The seller may agree to pay some or all of the buyer’s closing costs, which can include fees such as appraisal fees, title insurance, and loan origination fees.
2. Repair credits: If the home inspection reveals that repairs are needed, the seller may agree to provide a credit to the buyer to cover the cost of the repairs.
3. Price reductions: Instead of providing a credit or paying the buyer’s closing costs, the seller may simply reduce the price of the home to make it more affordable for the buyer.

Seller concessions can be beneficial to both the buyer and the seller. For the buyer, it can reduce the amount of cash they need to bring to the closing table and make the purchase more affordable. For the seller, it can make the property more attractive to potential buyers and help the sale go through more smoothly. However, it’s important to note that seller concessions may not always be possible, depending on the terms of the sale and the local real estate market conditions.

Is a rate buydown right for you?

Whether a rate buydown is right for you depends on your unique financial situation and long-term goals. If you plan to stay in your home for a long time and have the cash on hand to make the purchase,

It’s important to speak with a mortgage professional to determine whether a buydown is the right option for you. A Promise Home Loan experienced Loan Officer can help you understand the costs and benefits of a buydown mortgage and help you choose the best mortgage option for your needs.