Lower Interest By Buying Down Mortgage Interest Rates With Points
Buying Down Mortgage Interest Rates With Mortgage Points
Mortgage loan borrowers can get reduced mortgage rates by buying down mortgage interest rates with points.
- In refinancing as well as in a home purchase mortgage transaction, a mortgage lender usually offers a range of mortgage interest rates at different amounts of points.
- A point equals one percent of the loan amount.
- For example, three points on a $100,000 mortgage loan would add $3,000 to the financing charges.
- For mortgage loan borrowers who are planning on not selling their home in the near short term or not considering refinancing in the near future, buying down mortgage interest rates by paying upfront points for a reduced mortgage rate may be a good idea.
Benefits Of Buying Down Mortgage Interest Rates
Analyzing various mortgage interest rates and associated points may save you money.
- As a rule of thumb, each point adds about one eighth to one quarter of one percent to the interest rate the mortgage company is offering.
- Generally, the lower the mortgage interest rates on the loan, the more points the lending institution will charge.
- Some companies offer refinancing with no points, but generally charge higher interest rates.
- Benefits of buying down mortgage interest rates are that the homeowner will save a lot of money if and only if they intend on staying at their property for a long time.
- There is a break even point where it takes so many months and/or years to recoup the buy down premium paid.
- If homeowners intend on not staying in their homes for more than three to five years, it may not be beneficial to buy down the mortgage rates.
Reducing Rates By Buying Down Mortgage Interest Rates With Points
To decide what combination of rate and points is best for you, balance the amount you can pay up front with the amount you can pay monthly.
- The less time homeowners keep the loan, the more expensive points become.
- Homeowners planning on staying in their homes for a long time, then it may be worthwhile to pay additional points to obtain a lower interest rate.
Buying Down Mortgage Interest Rates With Sellers Concessions
Most lenders offer to finance the points so that borrowers do not have to pay them up front.
- This means that the points will be added to your loan balance, and borrowers pay a finance charge on them.
- Although this may enables borrowers to get the financing, it also will increase the amount of monthly payments.
- On home purchase transactions, home buyers can use sellers concessions for buying down mortgage interest rates.
- FHA Loans allows FHA mortgage loan borrowers to get up to 6% sellers concession from the home seller to use it towards closing costs.
- Sellers concessions can be used to buy points in buying down mortgage interest rates.
- Conventional Loans allows up to 3% sellers concessions from the home seller to the home buyer on primary owner occupant homes and second homes purchases and 2% sellers concessions on investment home financing.
- VA Loans allows up to 4% in sellers concession.
- USDA Loans allows up to 6% sellers concessions.
Home buyers needs to use up all of their sellers concessions on a home purchase. Any overage sellers concessions needs to go back to the seller. Whenever there is seller concession overages, loan officers should use those proceeds to buy down the mortgage interest rates with points.