This guide covers buying down mortgage rates with discount points to lower mortgage rates. Today’s mortgage rates are at historic lows. Many homeowners who refinance at these historically low rates do not plan on refinancing shortly. Therefore, they will pay a premium to buy down mortgage rates even lower than what par rates are today. Alex Carlucci explains buying down mortgage rates with discount points:
Borrowers buying down mortgage rates with discount points can do so with seller concession. There are instances borrowers need to buy down rates with seller concession to lower rates so they can meet the minimum debt-to-income ratio.
There are other reasons for buying down rates with paying discount points. One of the reasons is due to loan-level pricing adjustments. Borrowers with a high debt-to-income ratio may need to buy down the rate to qualify due to the high debt-to-income ratio. This article will discuss why borrowers buy down mortgage rates with discount points.
Reasons To Buying Down Mortgage Rates
There are multiple reasons why borrowers need to buy down mortgage rates. The primary reason is due to getting a lower rate. Buying down mortgage rates is a good idea if you plan on not refinancing for a while. Buying down rates is not recommended on a starter home. A homeowner plans on upgrading in five years or sooner.
Other reasons for buying down rates are for borrowers with lower credit scores. Government and conventional loans have a maximum rate cap. Lenders cannot charge beyond a certain rate. However, due to the loan level pricing adjustments, discount points are charged for lower credit score borrowers.
Debt-to-income ratio issues are one of the biggest problems mortgage borrowers encounter. Many with great credit and credit scores run into debt-to-income ratio issues. All mortgage programs have debt-to-income ratio requirements. However, each lender can have higher standards on debt-to-income ratios than those mandated by FHA, VA, USDA, Fannie Mae, and Freddie Mac. The additional debt-to-income ratio guidelines required by individual lenders are called lender overlays.
Buying Down Mortgage Rates Solution To High Debt-To-Income Ratios
A mortgage loan borrower can lower his mortgage rates by paying points. Seller concessions can be used to buy points in buying down mortgage rates. Buying down mortgage rates by paying points is often used for borrowers with high debt-to-income ratios. The maximum front-end debt-to-income ratio cap for FHA-insured mortgage loans is 46.9%. The maximum back-end debt-to-income ratio for FHA-insured mortgage loans is 56.9%. Pre-qualify for a mortgage just in five minutes
Debt-To-Income Ratios
Debt-to-income ratios are the total monthly payments a mortgage loan borrower has divided by their gross monthly income. The front debt-to-income ratio is the total housing expenses divided by the gross monthly income.
Housing expenses include the principal, interest, taxes, mortgage insurance premium, homeowners insurance, and the homeowner’s association dues, if applicable.
The back-end debt-to-income ratio is the sum of the total housing expenses Plus any other monthly minimum payments such as auto loans, minimum student loan payments, minimum credit card payments, and other installment minimum payments divided by the gross monthly income.
Buying Down Mortgage Rates With Discount Points
If the debt-to-income ratios are higher than the maximum allowed, there are still several options for borrowers to get a residential mortgage loan approval. The first option is to pay down all credit cards so there are no minimum credit card payments. If borrowers’ debt-to-income ratios still exceed the maximum allowed, buying down mortgage rates by paying points is a great option. Buying down mortgage rates is expensive.
How Many Points Can I Buy Down My Mortgage Rate in 2024?
In 2024, the number of points you can buy down your mortgage rate, known as Buying Down Mortgage Rates, depends on the lender’s policies and the specific loan program you are considering. Here are some key points to consider:
What is a Discount Point?
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- One discount point equals 1% of the loan amount.
- Paying one discount point typically reduces the rate for home loan by 0.25%, though this can vary.
Typical Range for Buying Points:
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- Most lenders allow you to buy down between 1 to 3 points.
- Lenders may permit more in some cases, depending on the loan terms and the borrower’s financial situation.
Restrictions and Considerations:
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- Lenders may restrict the maximum number of points you can purchase through their policies or loan program rules.
- There may be a point at which buying additional points offers diminishing returns.
- To determine whether buying points make financial sense, the break-even point (the time it takes to recoup the cost of buying points through monthly savings) should be considered.
Regulatory Limits:
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- Guidelines from the Consumer Financial Protection Bureau (CFPB) and other regulatory agencies may influence the structuring and sale of points, particularly for specific loan types like qualified mortgages.
It’s best to consult with your lender or mortgage broker to get specific information tailored to your situation. They can provide details based on the loan amount, type of loan, current interest rates, and their policies regarding discount points for buying down the mortgage rate on your home loan.
If you want a mortgage rate of 3.5%, you can get this rate by buying down mortgage rates by paying 3 points. For example, let’s take a case scenario. Let’s say current FHA-insured mortgage rates are at 4.25%. One discount point is 1% of the loan balance. 3 points on a $200,000 mortgage loan is $6,000. It is a one-time fee to buy down the rate. But many mortgage loan borrowers need to do it to get a lower rate to lower their monthly mortgage payments to qualify for a mortgage loan.. So it does not exceed the maximum debt-to-income ratio caps mandated by FHA mortgage lending guidelines. Speak With Our Loan Officer about your Mortgage Enquiry
Can Discount Points be Rolled Into the Mortgage?
Discount points, often associated with buying down mortgage rates, typically cannot be rolled into the mortgage balance directly, as they are part of the closing costs. However, there are strategies to effectively manage these costs. Seller concessions are a common approach where the seller agrees to pay for all or a portion of the buyer’s closing costs, such as discount points, as part of the bargaining process.
This can help reduce the out-of-pocket expense at closing without increasing the loan amount. Consider another choice: lender credits involve lenders covering closing costs in return for a slightly higher rate for home loan. While this doesn’t roll the points into the mortgage, it alleviates the immediate financial burden.
Certain loan programs may offer flexibility in managing closing costs, including discount points, allowing for a more tailored approach to buying down mortgage rates. For instance, during refinancing, some borrowers might have the option to incorporate closing costs into the new loan amount, effectively spreading the cost over the life of the loan. This increases the loan balance and monthly payments but can make the process more affordable upfront.
It’s essential to discuss these options with your lender or mortgage broker to understand the implications and find the best solution for managing the costs associated with securing a favorable rate for home loan.
Alternative To Buying Down Mortgage Rates To Get Lower Rates
An alternative to buying down mortgage rates to get lower interest rates so the borrower’s monthly mortgage payments are reduced to qualify for debt-to-income ratio requirements is choosing an FHA adjustable mortgage rate mortgage loan program. ARMs have lower mortgage rates than 30-year fixed-rate mortgage loans. There are 3/1 ARM, 5/1 ARM, and 7/1 ARM mortgage loan products. Adjustable-rate mortgages have much lower mortgage rates than 30-year fixed-rate mortgage loans. However, most lenders will not qualify at the current ARM mortgage rate but will add 2% for qualifying purposes. Due to this, changing to an adjustable-rate mortgage at a lower rate will not help lower debt-to-income ratios.
Seller Concessions To Use To Buy Down Rates
Homebuyers can use sellers’ concessions to buy down mortgage rates. The Federal Housing Administration (FHA) allows up to a 6% seller concession from the seller toward a buyer’s closing costs. USDA allows 6% seller concessions. VA Loans allow a 4% seller concession. Fannie Mae and Freddie Mac allow 3% seller concessions on owner-occupant properties and 2% on investment properties. Buying down mortgage rates requires the buyer to pay points. Points are part of closing costs, so seller concessions can be used towards paying points in buying down mortgage rates. Get mortgage advice now
FAQs: Buying Down Mortgage Rates With Discount Points
- What is Buying Down Mortgage Rates? Buying down mortgage rates refers to the process where borrowers pay discount points at closing to reduce their mortgage interest rate. This strategy can lead to lower monthly mortgage payments over the life of the loan.
- What are Discount Points? Discount points represent a form of prepaid interest. One discount point is equivalent to 1% of the loan amount and usually results in a 0.25% reduction in the Home Loan Rate. However, this may differ depending on the lender’s guidelines.
- Why would someone buy down their mortgage rate? Borrowers may buy down their mortgage rate to secure a lower monthly payment, meet debt-to-income ratio requirements, or offset higher loan-level pricing adjustments due to factors like a high debt-to-income ratio or lower credit scores.
- Can Discount Points be Rolled Into the Mortgage? Discount points are generally part of the closing costs and cannot be directly rolled into the mortgage balance. However, seller concessions can be used to cover these costs, or borrowers might opt for lender credits, which cover closing costs in exchange for a slightly higher interest rate.
- What are Seller Concessions? The seller concessions consist of the seller agreeing to pay a part of the buyer’s closing costs, which may encompass discount points. This arrangement can reduce the buyer’s initial expenses without increasing the loan amount.
- How many points can I buy down my mortgage rate? Most lenders allow you to buy down between 1 and 3 points, with each point typically reducing the rate for home loan by 0.25%. The number of points you are able to buy will be determined by the lender’s policies and the particular loan program.
- Are there any restrictions on buying down mortgage rates? Lenders may have policies that limit the maximum number of points you can purchase. Additionally, there might be diminishing returns after a certain number of points. Regulatory guidelines from agencies like the CFPB also influence how points can be structured and sold.
- Can buying down mortgage rates help with high debt-to-income ratios? Paying discount points to lower mortgage rates can assist individuals with high debt-to-income ratios meet the necessary ratio limits by decreasing their monthly payments, thus helping them qualify for a mortgage.
- What are some alternatives to buying down mortgage rates? Alternatives include choosing an adjustable-rate mortgage (ARM), which typically has lower initial rates than fixed-rate loans, or utilizing seller concessions and lender credits to manage closing costs without paying points out of pocket.
- Can I use seller concessions to buy down mortgage rates? Seller concessions can be utilized to cover the cost of discount points, reducing ratefor home loan. FHA loans allow up to 6% seller concessions, USDA allows 6%, VA loans allow 4%, Fannie Mae/Freddie Mac allows 3% for owner-occupied properties and 2% for investment properties.
Home Buyers who need to qualify for a mortgage with high debt-to-income ratios with a direct lender with no overlays can contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at alex@gustancho.com. We are available evenings, weekends, and holidays seven days a week.
This blog about Buying Down Mortgage Rates With Discount Points was updated on June 19th, 2024.
