One way to counter higher home loan interest rates is with a mortgage buydown—see how it works.

In the dynamic world of housing many things affect a homebuyer’s costs. A mortgage buydown is one way to reduce overall interest expenses and monthly payments. Here’s how it works and who might pay for it.

What is a mortgage buydown?

A mortgage buydown is also referred to as buying discount points. In exchange for an up-front payment at closing for discount points, the borrower gets a lower interest rate on their home loan.

A discount point may equal 1% of the loan amount and can reduce the mortgage interest rate by 0.25%. However, the reduction amount varies by lender so it is important to contact a mortgage loan officer.

Discount points are not the same as origination points, a fee most lenders require for loan processing. Discount points are always optional.

Buydowns can be permanent or temporary

Permanent buydowns are good for the life of the loan; these are usually paid for by homebuyers. As a hypothetical example, if you have a 15-year fixed loan at 6.5% and decide to buy two discount points—each worth a 0.25% reduction—the buydown results in a 6% interest rate for the entire 15-year mortgage term.

Sometimes to sweeten a deal, home sellers, builders, or lenders will pay for a temporary interest rate buydown that lasts from one to three years. For example, a 2-1 buydown gives the homebuyer a break of two percentage points for the first year and one percentage point the second year; after that the full interest rate goes into effect. Another example is the 3-2-1 mortgage buydown for a three-year-reduction; in year 1 the rate is 3% lower, in year 2 it’s 2% lower and in year three it’s 1% lower; from year 4 on the full interest rate is in force.

Pros and cons of discount rates

On the plus side, the buyer gets a lower interest rate for all or part of the loan, reducing monthly expenses and overall interest. The downside for a buyer paying for discount points, is that they have higher upfront costs at closing.

Mortgage buydowns can be used by sellers and builders to offer the buyer savings without cutting the price. If the seller, builder or lender pays for temporary discount points, the buyer gets lower costs for a while but must be prepared for a higher house payment when the rate increases. Mortgage buydowns can help pave the way to a sale but a seller, builder or lender who offers this incentive must pay for it.

Deciding if points are right for you

Homebuyers need to calculate the breakeven point—when the rate buydown fee is recovered by a lower payment. They also need to look at how long they plan to be in the house. The longer you stay the more likely you’ll see a benefit from purchasing discount points.

When deciding if discount points are a good choice, homebuyers must also consider how much cash they have on hand. They should be sure they have enough in their budget for home maintenance as well as a healthy emergency fund.

For sellers and home builders, mortgage buydowns can attract buyers and for lenders they can attract borrowers.

Get all your mortgage questions answered

At Consumers we love helping our members get the right home mortgage for their unique situations. Our friendly Mortgage Loan Officers can answer your questions and guide you every step of the way—from the time you apply until you sign the deal and you have your new home.

We could add more here about how much Consumers reduces rates per discount point paid.

 

All loans subject to approval. Rates, terms, and conditions are subject to change and may vary based on credit worthiness, qualifications, and collateral conditions.