How Much Does It Cost to Buy Down A Rate? A Comprehensive Guide

May 17, 2024 — 2 min read

Discounts? Percentages? Points? This isn’t a department store membership card. It’s the science of mortgage rate buydowns.

When you’re looking at 2024 interest rates, your mind might suddenly fill with questions:

How much does it cost to buy a lower rate?
What are mortgage points anyway?
Could it be worth it?

Ask away—we’ll try to answer every one of your questions about saving money on your loan through rate buydowns.

A rate buydown is a way for the borrower to pay less interest over time on their loan. This can be done by buying down the interest rate by purchasing discount point(s) during closing which will reduce the interest paid for the life of the loan,

-OR-

The borrower can pay less interest on the loan through a temporary buydown instead of waiting for a drop in overall interest rates. Buyers might pursue a temporary rate buydown to reduce the interest they pay for one to three years until mortgage rates come down.

Having every bit of knowledge about mortgages, including how to buy down a mortgage rate, can help you feel more comfortable with the mortgage process.

Mortgage Points—What Do They Mean?

There are two kinds of mortgage points. Discount points and origination points. We’re focused on discount points with mortgage rate buydowns. They do not apply to temporary buydowns.

Discount points are the payments made upfront that buy down the mortgage interest rate for the life of the loan, effectively lowering the cost of your monthly payment. (This shouldn’t be confused with origination points, which are fees for loan servicing charged by the lender as part of the closing costs.) Think of discount points more like pre-paid interest.

How Much Does It Cost to Buy Down A Rate?

If you’re looking into a mortgage rate buydown cost, here’s the general breakdown: One point typically costs 1% of your total loan amount and can drop the interest rate by .250 -.375, but the discount can depend on your lender, the loan type and the housing market.

If you wanted to drop your interest rate by a full 1%, it may cost up to three to four discount points, (4 x 0.25%) or (3 x .375) you’d likely end up paying 3–4% in fees of your total loan amount up front.

So, if your loan was $400,000, and you wanted to get a full 1% interest rate buydown, (bringing

down your rate to 6% from 7%) those three to four points would cost you $12,000 to $16,000 at closing.

WHO PAYS FOR THE BUYDOWN?

The seller or the builder will pay for the rate buydown, especially if the builder is trying to make a sweeter deal, or the seller is offering a concession during negotiations and closing.

HOW LONG DOES A BUYDOWN LAST?

Buydowns affect the interest rate you pay, and the monthly payments you make on your mortgage, either permanently (like when you purchase discount points), or temporary: for a limited time. Depending on which temporary buydown you choose, the time frame during which you enjoy that lower rate will vary.

Permanent interest rate buydown. This rate buydown is for the life of the loan, so the buydown rate you land on will be your rate for the length of the loan term.

Common buydowns.
1-0 Buydown - The lower interest rate lasts 1 year into the loan, after which the interest goes back to the regular contract rate.

2-1 Buydown - The lower interest rate lasts 2 years into the loan, but the discount changes. The first year is 2% lower than the contract rate, and the second year of the loan, the interest rate is 1% lower than the contract rate. By year 3, the rate is as it will be for the remainder of the loan term.

Less common buydowns.
3-2-1- Buydown - Similar to 2-1 buydowns, 3-2-1 buydowns give the borrower a rate discounted by 3% the first year, 2% the second, and 1% the third year of the loan. By year four, the contract rate is enacted.

PacRes Mortgage offers 1-year, 2-year and 3-year temporary buydown options that will lower a borrower’s mortgage interest rate up to three percent the first year, two percent the second year and 1 percent the third year if the 3-year buydown is chosen; it will revert to the original rate during the fourth year of the mortgage term.

Benefits and Considerations of a Temporary Rate Buydown

Buying down the rate offers a couple of benefits for borrowers:

Save on interest. The first one to three years of your mortgage or through the life of the loan, you can save thousands of dollars in interest—that adds up.

Lower monthly payment. If a monthly mortgage feels unattainable, the first few years with a lower rate thanks to discount points can help you transition into homeownership a little more easily.

Get a better deal. If you can’t get the seller to budge on the house price, they might offer up a rate buydown during negotiations—that’s money (via interest savings) you don’t have to pay.

For every benefit of temporary mortgage rate buydown, there’s another side of the coin to keep in mind. Temporary buydowns are temporary. The often-large fees for a temporary buydown are due upfront, at closing. Additionally, the higher contract interest rate that hits after the temporary buydown period ends may come as a shock—and might not fit into the budget you’d planned.

WHEN CAN’T I DO A TEMPORARY RATE BUYDOWN?

Not all loans are eligible for buying down a temporary mortgage rate. Typically, only the purchase of a primary or secondary residence can qualify. Meaning, investment properties don’t qualify for a temporary buydown. Check with your lender about regulations for your specific loan: Conventional, FHA, VA and USDA all limit how many points sellers or builders can contribute to a buyer.

CALCULATE LONG-TERM SAVINGS

In order to know whether a buydown is worth it depends on how long it lasts. Plus, when you know the loan you’re seeking, and whether that loan is eligible for a rate buydown, you can calculate your long-term savings.

Before we get to calculating, a rate buydown is probably worth it if it’s a seller or builder-paid rate buydown. Enjoy a lower interest rate for 1-3 years, or the life of the loan with no fee for you, a double win.

But if it’s on you, the buyer, to buy down the rate, you’ll want to determine your break-even point—essentially seeing if you’ll be in the house long enough to break even on the upfront payment you made:

Cost of the Points
~~—----------------------~~ = Breakeven point
Monthly Savings

Example: A $400,000 loan will cost $16,000 to help buy down the loan (3-4 points’ worth). The monthly savings going from a 7% interest rate to a 6% interest rate will be $2400 (instead of $2800). The savings is $400/month. To recoup your $16,000, it will take 40 months, over three years. If you’re planning on staying in the house for longer than those 40 months, it might be worth it to you.

Alternatives to Buying Down A Mortgage Rate

If you did the calculations and the math isn’t working out in your favor, there are other ways to reduce your interest rates or lower your monthly payments.

Negotiating Seller Price. A lower monthly payment starts with a smaller principal—try to negotiate the cost of the home, so your loan amount isn’t as large, and your monthly payments are smaller, too.

Adjustable-Rate Mortgage (ARM). This loan product initially starts with a lower rate, between 3-10 years, and then resets to market rate, fluctuating with the market.

Refinancing. If you see rates have improved since you took out your home loan, it may be worth refinancing—essentially replacing your current loan with a brand new one at a better rate. Or, you could aim for a shorter-term loan (15-year term) to save on interest.

Should I Buy Down My Rate?

Buying down your mortgage rate is a decision that should be made knowing all the facts about the cost versus the benefit, and your future plans: How long you plan to stay in your home, and whether you can afford the higher monthly payments when the original contract interest rate resumes after the temporary buydown period.

Reach out to one of our advisors at PacRes Mortgage today to learn more about making home purchases affordable, and whether buydowns could be key in getting you there.

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