Buydowns & Paying Points. What are they?
When you apply for a mortgage, you will likely be offered the option for a buy down or to pay points. This is a way to lower your interest rate by paying a fee upfront. While it may seem like a good deal, it's important to understand the pros and cons of buying down and points before making a decision.
I'll explain a little about it so you can decide if it's the right choice for you.
First let's cover the difference.
Paying Points is a permanent way to lower your interest rate, and you will generally pay 1% of the total loan up front in exchange for a 0.25% rate reduction, but the cost can vary, so make sure you read the fine print.
This may be a good option to explore if you are fairly certain you will be in your home for a long time and have extra cash up front, but aren't necessarily interested in paying your loan off early or refinancing. This may also allow you to stretch your monthly home budget, as your payment would be less.
It’s important to ask your lender at what point you would break even. Meaning, if you make only your minimum payment on your loan each month, how long will you need to make those payments before the monthly savings evens out with the lump sum you bring to the closing table. If there is a chance you think you would need to sell before then, or if you would likely refinance, then it may not be the best investment.
A Temporary Buy Down is generally for someone who may not stay in their home as long, or are open to refinance if rates drop, and is especially good if you can get the seller or builder to pay for the buy down.
A common buy down would be a 2-1 buy down, where you would lower your rate by 2% points the first year and 1% percentage the second year. It can save you a lot of money, particularly if you can get the fee paid for you, but it's always good to see if it would make more sense to get the seller to pay for a different concession.
In this case you would need to qualify for the loan based on the full interest rate that would be charged after the buy down has expired.
As I'm sure you have noticed, either of these options have pros and cons and there is no magic bullet, but worth doing some research. Let’s be honest, banks aren’t in the habit of throwing away money. It’s generally more of an in one hand and out the other situation. But, while interest rates might seem high at the time I’m writing this, they are still below the average interest rates we have seen in the United States since they have been tracked and it's a great time to become a homeowner. Keep in mind, if a lender offers you what seems like a magically low rate, they may be getting it there by requiring you to pay points to do so, so always ask for details. They are required to provide them!
And just remember. If you thought about googling “who is the best real estate agent near me” then you already found me! At TREO Realtors® you have found one of the top real estate companies in Cincinnati and we are always here to educate and empower you through the process of building, selling or buying a home.
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I can’t wait to meet you!
Call me at 513-486-4589 or email me at alysa@myhomeincincy.com to set up that first phone meeting.
- ALYSA M. ORTEGA
