When you “buy down the interest rate” on a mortgage, you are essentially paying a fee to your lender in exchange for a lower interest rate on your loan. This can be a good option for homebuyers who are looking to reduce their monthly mortgage payments and save money on interest over the life of their loan.
There are a few different ways to buy down the interest rate on a mortgage:
- Pay points: You can pay a one-time fee, called “points,” to your lender in exchange for a lower interest rate on your loan. Each point is typically equal to 1% of the loan amount, so if you took out a $300,000 mortgage and paid two points, you would be paying $6,000 upfront in exchange for a lower interest rate.
- Use a lender credit: Some lenders may offer a lender credit in exchange for a higher interest rate on your loan. This credit can be used to cover closing costs or to buy down the interest rate on your loan.
- Work with a mortgage broker: A mortgage broker is a professional who works with multiple lenders and can help you find the best mortgage rates and terms. They may be able to negotiate a lower interest rate on your behalf.
Benefits of buying down the interest rate on a mortgage:
- Lower monthly payments: By paying a fee to buy down the interest rate on your loan, you can lower your monthly mortgage payments, which can make it easier to afford your home.
- Savings on interest: A lower interest rate means you will pay less interest over the life of your loan, which can save you thousands of dollars.
- Potential to refinance: If you buy down the interest rate on your mortgage and then rates drop later, you may be able to refinance your loan and get an even lower rate, which can further reduce your monthly payments and save you even more money.