Mortgage Buydowns
A mortgage buydown is basically a way for you to lower the interest rate that a loan officer has quoted to you. However, it does involve paying an extra fee. It seems rather simple, but there is a process that is involved in mortgage buydowns that you may want to know about so that you can save yourself thousands of dollars on your mortgage.
How mortgage buydowns work
Let’s say that you are speaking with a mortgage company and they have offered you an interest rate of 6%. However, you feel that you can get a lower rate than that and save yourself some money. Although 6% is a very good rate, it is possible to go lower. So what you do is tell the loan officer that you want to pay a point on the loan in order to “buy down” the interest. Perhaps you want to buy it down to 5%.
When you do this, your closing costs will be higher, but you don’t have to pay the 6% interest rate through the life of the loan. Even if 6% is the lowest rate that the mortgage company offers, paying that one point on the loan gives them the financial ability to give you that 5% rate. In many cases when a financial institution can only offer a certain minimum, the only way they can offer you a lower rate is through a mortgage buydown.
Technically, what you are doing here is trading your money for one point on the loan and that will also lower your monthly payment. What you do is entirely up to you. Think of it this way: It is like you putting $1200 in the bank and then taking out $100 per month to help you make your mortgage payment for the year. So if your payment is $850 with the 6% interest, you can get by with paying $750 on the 5% interest. You are just trading one thing for another based on what you feel is important to you at the moment.
In the long run a buydown can be a very smart move due to the fact that you don’t know what the future holds and having that lower payment can be the difference between keeping your home and losing it when hard times come about.
The term
You also need to take a look at the mortgage term because this is going to influence the amount of your monthly payment as well. When you opt for a shorter term, your interest rate may be lower because of that. When the term is shorter, you are viewed as not being very high risk. Your monthly payment will be higher, but you will have the home paid off much faster than if you were to opt for a 30-year mortgage. However, not everyone can afford the higher payments, so they opt for the longer term.
And at any point you can refinance the mortgage in order to receive a shorter term or a lower monthly payment. Then again, you may opt to cash in your equity for home improvement projects, a vacation, or something else you have in mind. You have many options you can take advantage of.