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mortgage rate buydowns

MORTGAGE RATE BUY-DOWNS

A buydown is a way for a borrower to obtain a lower interest rate by paying discount points at closing. Discount points, also referred to as mortgage points or prepaid interest points, are a one-time fee paid upfront. In the case of discount points, the interest rate is lower for the loan term.


In an alternate form of buydown, the points purchased reduce the interest rate for the first few years of the loan. This arrangement is typically paid for through funds escrowed by the seller. Since the interest rate is lower during this time, the borrower’s monthly mortgage payments are more affordable.


Because mortgage rates are forecasted to continue rising in 2022, the buydown method can be a useful tactic to protect yourself against rate hikes.


1% of a mortgage rate = 4 points
1 point = 0.25% mortgage rate
Buying down the rate by 1 point costs 1% of the loan amount.
Mortgage Rate Buy-Down Example:
Buy down mortgage rate from 6.5% to 5% on a $500,000 mortgage loan amount.
6.5% – 5% = 1.5%
1.5% = 6 points (1.5% ÷ 0.25%)
1 point = $5,000
Therefore 6 points = $30,000.

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