Mortgage Rate Buy Down With Discount Points With Sellers Concessions


Mortgage Rate Buy Down With Discount Points With Sellers Concessions

This BLOG On Mortgage Rate Buy Down With Discount Points With Sellers Concessions Was UPDATED On December 3rd, 2018

How Does Buying Down Mortgage Interest Rates Work?

  • A mortgage rate buy down is paying a percentage of the loan, also known as discount points, to reduce the mortgage rate
  • Borrowers can buy down with discount points from the original mortgage rate that is being quoted to borrowers
  • When borrowers apply for a mortgage loan, the loan originator will give borrowers several options
  • As an example, say a borrower applied for a mortgage loan:
    • The best mortgage rate the loan originator can offer the borrower with no points is 5%
    • Borrowers who feel that they intend on keeping the home for a while and feel that mortgage rates are low may want to explore in buying down the mortgage interest rates
    • Borrowers have the option to get lower mortgage rates by paying discount points
  • Maybe by one percent of the loan amount, mortgage rate buy down, the new interest rate might be 4.75%
  • Maybe paying 2 points the mortgage rate might drop to 4.5% (This is a hypothetical case scenario)

Mortgage Rate Buy Down With Points

Borrowers who decide to buy down mortgage rates, it will be classified as a discount fee on mortgage disclosures.

  • The discount fee is normally tax deductible
  • Borrowers can buy down their mortgage rates by paying upfront points
  • Buying down mortgage rates is recommended only for borrowers who plan on living in their home for long term and not refinancing their home loan in the very near future
  • One point is equivalent to one percentage point of the mortgage loan amount

Reducing Mortgage Rates By Paying Points

Buying down mortgage rates varies with different lenders.

  • Sometimes, mortgage rate reduction might only be 1/8 of a percent for a one point mortgage rate buy down:
    • It might not be worth it
  • Other lenders might reduce mortgage rate by 0.50% for a one point mortgage rate buy down:
    • This will be worth paying the points
  • There is no set price on how much mortgage rates will get reduced by paying points
  • This is because it also depends on the mortgage markets and where the interest rates are

Is Mortgage Rate Buy Down Beneficial?

Mortgage interest rates depends on the risk the lender takes on the borrower.

Here are what determines mortgage rates:

  • Credit Scores:
    • The lower the borrower’s credit scores, the higher the risk the lender has so the higher mortgage interest rates
  • Loan To Value:
    • The lower the LTV, the less risk the lender has because the borrower has more skin on the game therefore larger down payments (lower LTV) means lower mortgage rates
  • Types of properties:
    • Condominiums, town homes, and two to four unit properties are classified as higher risk than single family homes
    • So there is normally a mortgage rate adjustments on non-single family homes
  • Discuss buying down your mortgage rates and whether buying down mortgage rates makes sense  with loan originator to see if it will be worth to pay the upfront point for the reduced interest rate
  • Homeowners who are only planning on staying in their home for a short while, it might not be worth it
  • However, homeowners who intend on staying in their homes for more than 5 years, it might be well worth while to pay points for a mortgage rate buy down
  • A loan officer can assist with the pros and cons
  • They can go over a chart on the amount of savings versus the points that homeowners will be paying for the mortgage rate buy down

Sellers Concessions For Mortgage Rate Buy Down

Sellers Concessions is when a home seller will give a home buyer either a percentage and/or set amount to cover their closing costs.

  • Any overages of sellers concessions normally goes to pay down the mortgage interest rates
  • Overages in sellers concessions cannot go to the home buyer
  • Needs to go back to the seller under mortgage regulations
  • Most loan officers just use the overages in sellers concessions to buy down the rate for the borrower

Maximum Sellers Concessions Allowed

Here are the maximum amounts of sellers concessions allowed on various loan programs:

  • 6% sellers concession is allowed on FHA Loans
  • 4% sellers concessions is allowed on VA Loans
  • 6% sellers concessions is allowed on USDA Loans
  • 3% sellers concessions is allowed on Conventional Loans for owner occupant properties and second homes
  • 2% sellers concessions is allowed on Conventional Loans for investment properties
  • Most NON-QM Loans will accept up to 6% in sellers concessions

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