Should I Buy Down My Mortgage Rate?
Though the past few years saw a boom in the housing market, mortgage rates have begun climbing and driving monthly payments out of reach for many Americans. First-time homeownership has decreased, as has the willingness of current homeowners to lift their roots and face a market where they are less likely to get as much house for their money. As a result, the housing market has slowed and home sellers are looking for ways to boost their sales.
One effective method for sellers and builders is to buy down the mortgage rate. This allows more people to purchase homes without being saddled with an impossibly high monthly mortgage payment from the interest.
What Is Buying Down the Mortgage Rate?
A buydown on a mortgage is a method used to lower the mortgage’s interest rate for the borrower by paying discount points when they close on the home. Discount points, also referred to as prepaid interest points or mortgage points, are paid as an upfront, one-time fee that lowers the interest rate over the term of the loan. There are alternate forms of a buydown that involve purchasing points that lower the interest rate of the loan but over a set amount of time at the beginning of the loan.
This form lowers the monthly mortgage payment over the predetermined length of time, making it more affordable for that period. Ultimately, a buydown is a route that buyers can take to combat the predicted trends of high mortgage rates and ensure a more manageable mortgage payment and protect themselves against interest rate hikes.
How much you can buy down a mortgage rate depends on the amount you are taking out on the loan and how many points the lender is willing to give. Each point can be bought for 1% of the total loan amount. For example, the mortgage lender may offer the borrower the opportunity to exchange one point to lower their interest rate by 0.25%. If the mortgage amount is $300,000 at an interest rate of 6%, purchasing a point for $3,000 will lower the interest rate from 6% to 5.75%.
Who Can Buy Down a Mortgage Rate?
Though the buyer stands to benefit significantly from a buydown, they are not the only ones that can purchase points to decrease the buyer’s interest rate. Sellers can buy down the buyer’s mortgage as an incentive to purchase the home, but the cost of the mortgage points is typically added to the purchase price of the home, especially in a seller’s market.
Builders are also able to buy down a mortgage. This typically happens in newer neighborhoods as homes are built and become ready for new owners—the builder will attract new community members with the benefit of a lower interest rate. This provides the homeowners with a better interest rate and more affordable mortgage payment, as well as creating a neighborhood for other homeowners as more homes are built.
Is it Beneficial to Buy Down My Mortgage Rate?
There are many different incentives and programs for Americans to take advantage of that will help them with homeownership; however, a lot of these programs target groups like teachers or first responders. A perk of buying down a mortgage is that anyone can qualify as long as it is offered by the lender and the upfront costs fit into the buyer’s budget. Though a lower interest rate is always better, a buydown is most effective if the builder or seller offers to cover the costs.
A situation where a buydown may not be beneficial is if the buyer does not plan to keep the home for a long period of time. Since the buydown is based on a larger upfront payment that offers returns on the long-term interest rate, it is imperative to calculate the breakeven point. This is the period of time it will take to recoup the value of the purchased discount points. It is calculated by dividing the total cost of the points by the monthly savings.
The skilled home builders that VIDA uses employ creative solutions like buying down mortgage rates, so people in search of a home are more likely to afford it. Though the market fluctuates frequently, and the resulting mortgage rates reflect this instability, VIDA builders are creating a route to homeownership for those feeling discouraged or overwhelmed while searching the current market. If you are interested in San Antonio housing, stay in touch with us to get the latest on the amazing new things happening with VIDA.