Buying Down the Rate
It’s the most frequently-asked question we get: “How can I get a lower rate?”
You can almost always get a lower rate, but it’s going to cost you something. Buying down your interest rate involves paying an upfront fee to the lender in exchange for a reduced interest rate on your mortgage. The lower your rate is, the higher up-front fee you have to pay at your loan closing. This fee is called “discount points.” As the name implies, there’s a discount. It’s a discount towards your rate and not your closing costs. It’s calculated as a certain percentage of your loan amount.
Lowering your interest rate brings your monthly payment down. This reduction can make homeownership more affordable and ease your financial burden over the life of the loan. This may be especially beneficial if you plan to stay in your home for an extended period, as the cumulative savings over the years can make a notable difference.
That all sounds great–so why wouldn’t you pay discount points?
The more money you pay up front, the greater the amount of time you would need to stay in that loan in order to make that money worthwhile. If you pay $2000 for a lower rate and that lower rate only saves you $20/month in your monthly payment, you’d have to make 100 payments in order to break even on your funds. 100 payments is almost 9 years. It’s not often that people remain in the same mortgage for that long, either because they refinance or because they move into a new home.
Additionally, if there is an expectation that interest rates will go down in the future, your loan officer might advise that you not pay any points now and wait until rates drop to get that lower rate for free.
Buying down your interest rate can be a strategic move in your homeownership journey. It's a financial strategy that, when approached thoughtfully, can lead to increased affordability, long-term savings, and a more comfortable homeownership experience. As with any financial decision, careful consideration and consultation with your lender are essential to ensure that this strategy aligns with your overall financial goals and enhances your path to homeownership.