This Article Is About Buying Down Mortgage Interest Rates With Discount Points
Borrowers can get reduced mortgage rates by buying down rates with points.
- Discount points are origination fees charged by lenders in lieu of getting lower mortgage rates
- However, borrowers should buy discount points to buy down rates if they intend on not refinancing their home loan for at least five or more years
- There are times when lenders charge discount points due to loan level pricing adjustments (LLPA)
- For example, if a borrower has a 580 credit score and the maximum rate for a 580 credit score borrower on an FHA loan is 4.25%, the lender may have a 2.0% discount point loan level pricing adjustment
- The 2.0% discount point is an origination fee for a 580 credit borrower on an FHA loan due to the lender taking a risk
- The 2.0% discount point LLPA is part of the borrower’s closing costs
- Borrowers who have LLPAs due to lower credit scores should get sufficient seller’s concession so they can cover the discount points due to having a lower credit score
- Discount points can be covered with the seller’s concession because they are part of the borrower’s closing costs
If a borrower has high credit scores and got quoted a low mortgage rate, they can get even a lower mortgage rate by buying down the rate by buying the rate down with discount points.
Buying Down Rates With Discount Points When Refinancing
In refinancing as well as in a home purchase mortgage transaction, lenders usually offer borrowers to buy down their rates with discount 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 borrowers who are planning on not selling their home in the near short term or not considering refinancing in the near future, buying down interest rates by paying points for a reduced mortgage rate may be a good idea
In this article, we will cover and discuss Buying Down Rates With Discount Points.
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 upfront with the amount you can pay monthly.
- The fewer time homeowners keep the loan, the more expensive points become
- For 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 upfront.
- This means that the points will be added to your loan balance, and borrowers pay a finance charge on them
- Although this may enable borrowers to get financing, it also will increase the number of monthly payments
- On home purchase transactions, homebuyers can use sellers concessions for buying down mortgage interest rates
FHA Loans allows borrowers to get up to 6% sellers concession from the home seller to use it towards closing costs.
Sellers Concessions Can Be Used To Buydown Rates With Discount Points
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
- 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
Homebuyers need to use up all of their sellers’ concessions on a home purchase. Any overage sellers concessions need to go back to the seller. Whenever there are seller concession overages, loan officers should use those proceeds to buy down the mortgage interest rates with points.