Buy Down Interest Rate?

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How do you "buy down" an interest rate, and should you?

The precursor to this question is another question: "How long do you plan on keeping the mortgage?"

If you are planning to keep the mortgage for more than 3-years, paying points to reduce your interest rate usually always makes sense assuming that expending extra cash to this end at closing is not an issue. If you will only have the loan for 1-3 years, paying points may or may not make sense depending on the what mortgage options are best for your situation and whether paying out extra cash at closing defeats the purpose of getting the mortgage loan (e.g. getting maximum cash out).

A "point" equals one percent (1%) of the mortgage amount. Paying one or more points, or partial points up-front will lower your interest rate and naturally reduces the total interest paid over the course of the loan. When you pay points, you trade off paying more money later in favor of paying less money now. As a rough rule of thumb, 1 point paid up-front will return you 1.5 points in reduced interest costs over a 3-year period.

There are a variety of loan programs with different interest rate and point combinations to consider. Don't be enticed by a low low interest rate; you must consider the entire package. The Annual Percentage Rate (APR) was introduced by our Federal government to help consumers compare different loan terms, rates, and points. All lenders are brokers are required publish the APR when advertising. However, as a word of advice, do not use APR as your sole gauge in making your loan decisions. There are many factors that are not reflected in an APR that are guaranteed to be of importance to you. Please read about APR before using!