This is how interest rate buydowns work and how they can benefit you.

How can you save money on your next real estate purchase or refinance? One potential answer is the mortgage interest rate buydown. Let’s look at that concept and how it could work for you.

A rate buydown is essentially a trade between you, the borrower, and the entity lending you the money for the house. You will trade them some additional cash upfront for a lower mortgage interest rate and payment. 

When mortgage interest rates were very low in the last few years, the rate buydown relationship wasn’t good. Essentially, the amount of cash you had to give your bank or mortgage company upfront and what they were willing to reduce the interest rate by just didn’t add up. Now that mortgage interest rates have gone up a bit, the relationship has improved for borrowers.

“This interest rate buydown could save you money if rates go up.”

As an example, let’s say you have a $500,000 loan, your credit score is 780, you’re putting 10% down, and your rate is about 7.125%. At a one-point rate, meaning you gave your bank or mortgage company $5,000 in exchange for them reducing your interest rate, it takes the interest rate from 7.125% to 6.625%. The payment goes from $3,368 to $3,201, meaning a difference of $167 per month. When you do the math, you get your $5,000 back in about two-and-a-half years. 

Whether or not to do this depends on your thoughts about the future of interest rates. If you think we’re at a point where they’re as high as they’re going to be, and you’ll be able to refinance in the future, you probably don’t need to commit to this buydown option. On the other hand, if you think rates are pretty good and may get higher soon, you may want to buy your rate down as much as possible since you won’t be able to refinance.

If you have any more questions about this or real estate in general, please feel free to call or email me. I would be happy to serve as a resource for all of your real estate needs.