At Corder and Associates, our expertise spans the full spectrum of real estate transactions, from the initial search to the final handshake. And we’re not just finding your dream piece of land—we’re negotiating the best deal. We dive into the deep end of finance options to secure your dream property. The path to property ownership can feel like a maze, with the twists and turns of mortgages and the myriad options tailored to your financial circumstances. One such path, often misunderstood, is the mortgage rate buy-down. Navigating the nitty-gritty of this option, especially ‘points,’ could mean saving big over the lifetime of your loan. With our guidance, you’ll be well on your way to making an informed decision.

What is a Mortgage Rate Buy Down? 
A mortgage rate buy-down involves paying extra money upfront to reduce your mortgage interest rate for a portion or the entire term of the loan. This upfront payment is known as “buying points” or “discount points.”

How Do Points Work? 
When you buy points, you’re prepaying interest to receive a lower rate on your mortgage. Here’s a breakdown:

• Cost of Points:One point costs 1% of your loan amount. For a $300,000 mortgage, one point would cost $3,000.
• Interest Rate Reduction:Buying one point usually reduces your interest rate by 0.25%. This varies by lender and loan type, so ask your lender for details.
• Break-Even Point:This is when the savings from your reduced monthly payments equal the upfront cost of the points. It helps determine if buying points is financially beneficial.

Calculating the Benefits 
Let’s look at an example to understand the impact of buying points:

• Loan Amount:$300,000
• Interest Rate Without Points:5%
• Interest Rate With 1 Point:25%
• Cost of 1 Point:$3,000

Your monthly payment (excluding taxes and insurance) would be about $1,520 without points. With one point, it would be about $1,476, saving you $44 per month. To find the break-even point, divide the cost of the point ($3,000) by the monthly savings ($44), resulting in approximately 68 months, or a little over 5.5 years. Buying points could be advantageous if you stay in your home longer than the break-even period.

Pros and Cons of Buying Points 

Pros:

• Lower Monthly Payments:Reduced interest rates lead to lower monthly mortgage payments.
• Interest Savings:Interest savings can be substantial over the loan’s life.
• Tax Benefits:Points are often tax-deductible in the year they are paid. Consult a tax advisor for guidance.

Cons:

• Upfront Cost:If you don’t have enough cash or prefer to use it for other expenses, buying points may not be feasible.
• Break-Even Time:If you plan to sell or refinance before reaching the break-even point, you won’t recoup the cost.
• Alternative Investments:The money spent on points could potentially be invested elsewhere for a higher return.

When to Consider Buying Points

• Long-Term Stay:If you plan to stay in your home for a long time, the savings from a lower interest rate can outweigh the upfront cost.
• High Cash Reserves:Buying points can be a good investment if you have enough savings to cover the upfront cost without depleting your emergency fund.
• Tax Considerations:If the tax deduction for points benefits your overall tax situation, it might be worth considering.

A mortgage rate buydown can be a wise financial decision, providing reduced monthly payments and substantial interest savings. Before proceeding, it is essential to carefully assess your financial status, future objectives, and mortgage conditions. Seek advice from a mortgage consultant to determine the viability of purchasing points. If you have any inquiries, please don’t hesitate to reach out.