There is a lot of terminology associated with a mortgage, and at times it can be intimidating. Today we are going to discuss what it means to buy down a rate on a mortgage and when it would be advantageous to do so.
While working with your mortgage company you will be quoted a series of interest rates based upon the type of mortgage loan you are applying for, your credit rating, and the amount of money being borrowed.
Your mortgage professional will explain to you that you have the options of buying down your rate by paying discount points. A discount point is a type of prepaid interest on mortgage that lowers the interest rate on the loan throughout the life of the loan. Discount points are calculated by a percentage of the loan.
The table below shows an example of discount points based on a $250,000 30 year fixed mortgage. (Please note that this table is just an example, and not a quote of any rates that Aceltis Financial Group is offering.)
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The table above shows that depending on how low you want your interest rate to be on the loan you must pay a certain percentage of discount points. In this example the borrower can choose to not pay any discount points and have the rate of 4.5%, or they can pay up to 1 discount point for a total of $2500.
Buying down your interest rate by paying discount points can be advantageous to borrower in the long term. It will require more money out of pocket at the time of closing, but ultimately will save borrowers thousands of dollars over the life of the loan.
In the table above the difference in payment between 4.50% and the 3.75% on a 30 year fixed mortgage is $109 monthly. After just 23 months of payments the borrowers recoup the $2500 extra they paid at closing. Each subsequent payment is a savings of $109 for the borrowers totaling in $36,733.
When deciding what course of action to take when closing on your next home loan, keep in mind the long term benefits of buying down your rate. If you see yourself staying in your home for a long period of time, buying down your rate can save a lot of money over the life of the loan.