Whether you’re buying or selling a home, just watching the market or following financial trends, almost everyone is watching interest rates right now. Closely tied to inflation rates, mortgage interest rates tend to mirror the other so if one goes up so does the other and vice versa. So with inflation being a hot topic right now because of the increases this year, interest rates are also up which means that if you buy a home while interest rates are higher and some homebuyers are electing to participate in buying down their interest rates.
In short, buying down interest rates is when a buyer puts down more money upfront to reduce interest rates and the mortgage amount in total. Many sellers are offering this as an option instead of lowering the purchase price. It can really be a ‘win’ for homebuyers. Unlike a traditional down payment increase, this is designed to decrease interest rates by decreasing points. A mortgage point is 1% of the total mortgage amount and paying towards this reduces the interest rate and, in turn, the payment. A majority of homebuyers use a mortgage to buy a home so if you’re in the market to buy a home using a mortgage, read on to determine if buying down an interest rate is right for you.
PROS
1. The longer you’re in the home, the better ROI you get on this financial decision
If you decide to buy down your interest rate, this will be more money upfront. If you are planning to be in the home for only a few years, or if your mortgage is less than 30 years then your ROI will take longer to recoup, or you may not get it back at all. This is a good long-term strategy but not necessarily in the short-term.
2. Reduce long-term costs
If you’ve ever looked at an amortization table, you know how much even a 1% difference on an interest rate makes. Buying down your mortgage greatly saves you money in the long-term and can help to reduce long-term costs in general.
3. May be able to avoid refinancing later
Some people decide to buy a home at a higher interest rate only to refinance a few years later, possibly costing many thousands of dollars. If you decide to buy down your mortgage rate upfront, this may save you from refinancing later. However, if you are in the home for the long-term, doing both is also an option to get the lowest rate possible.
CONS
1. More money upfront
Of course, this option is more money upfront so if you are on a strict budget with little upfront capital after your down payment and moving costs, this may not be a viable option for you. This option depends on having money left over after your down payment. But as mentioned above, sellers are offering this as an incentive to buy.
2. Not worth it for the short-term
If you’re only planning on owning the home for a short-time, think less than 3 years, this option may not reach a break-even point for you. It is wise to run the numbers and I can help with this. This may not be a concern for all buyers, but it’s worth noting this option works best the longer you plan to be in the home.
3. Might not be worth it for a less than 30 year mortgage
It’s best to speak with your financial advisor or mortgage broker to see if this will reduce your payments enough to make the costs worth it.
Bonus: Did you know that one possibility of a buy down strategy is an opportunity to use some of the “savings” to reduce a refi strategy before the term of the buy down ends. Contact me or your mortgage professional to learn more.
Do you have concerns or questions about paying down your mortgage? Are you in the market to buy or sell your home? Call and text me at (720) 323-4176 or email me at [email protected]
