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Should I Buy Down My Rate?

When seeking a mortgage, borrowers often get fixated on a specific rate that has an emotional brink; usually something like 6.49% or any other number that we as humans find visually pleasing.

However, deciding to buy down an interest rate is far more complicated than just an attractive number up front.  Borrowers really need to look at their long-term plan for the home before moving forward.  After all, buying down the interest rate is an upfront cost with savings that will not be realized for many years to come.

The Scenario

  • You are offered a rate of 6.25% on a $250,000 fully amortized, 30 year fixed rate loan with no discount points
  • You have convinced yourself that you need a rate of 5.99% at a cost of one point (1% of the loan amount – in this case $2,500)
  • Your savings for buying down the rate to 5.99% will be $42.02 per month

Consider this: How long will it take you to recover the upfront cost?  $2,500/$42.02 = 59.49 months, or just short of five years.

This is the part that many people overlook; you need to decide how long you plan to stay in the home and how long you plan to stay in the loan.  If you sell or refinance before those five years have passed, simply put, you have lost money.  However, if you stick around a bit longer, the buy down will begin to make sense.

Another issue to consider is that many borrowers who have paid to buy down a rate will wait to refinance because they want to ensure they meet the savings they were originally going after when they bought down the rate; if the rates drop significantly, you could be missing great opportunities to save even more money.

As with most things, many parts of this situation are uncontrollable because of the often-unknown interest rate environment and, therefore, make this a difficult decision.

The Bottom Line: Paying points may make a lot of sense if interest rates climb significantly in the years after you buy down your rate, because you’ll likely stick with your current mortgage and see the savings through; the opposite is true in times when interest rates decline sharply. Beyond that, you may find a buy-down to be advantageous if you plan to live in the house – and not refinance the loan – for a very long time. With that being said, please take the time to analyze your situation to see if buying down your interest makes sense for you. I would be happy to help you think this through; call me.

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