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The Interesting Points of a Mortgage Buydown
Click Ahead in Time

Interest Rate Trends

As you can see on the graph below, interest rate trends have no course. There is volatility in a small range of rates. For instance, the 30 year fixed rate mortgage, with 0 points, has been between 7.625% and 8.25%. Historically speaking it is not a bad rate in either case. The risk can be eliminated even further by locking-in and floating down. For now the market appears to be waiting for a sign.

An Interest-ing Question

Q:

I had a small question to ask so I mailed it electronically for your convenience and safety. We're considering a the purchase of a house with a mortgage amount of about $200,000. It has potential, but will need about 10k of work (if we get it.)

The sellers are featuring a mortgage "buy-down" worth up to 4pts. Currently, the real estate company says we can get a mortgage at 61/4% if we put down an additional 3pts and use their services. What the heck's going on?

A:

A buydown is a temporary solution ... that is why it is called a "temporary buydown." What you are doing is putting a large chunk of money (in this case about $8,000) into a fund (called a buydown subsidy) at the bank. For the first two years, the bank takes some of the money out of the fund each month and helps you make your mortgage payment. Your mortgage and note rate are always the same (in this case 7.5%) It only feels like an interest rate of 5.5% the first year and 6.5% the second year.

Q:

Is there a catch with the buy-down? Can you get us a buy-down?

A:

Yes, I can do the exact same thing (or better). Is there a catch ... yes. It is probably not the best use of your money. If you could use the $8,000 any way that you wanted, would you choose a buydown? I wouldn't. I would either:
  • Buy the rate down permanently (like use the money towards points on a 30 year fixed rate). This is still not the smartest thing to do.
  • Use the money toward my other closing costs. This is what I would do. Keep control of the money.
  • Take 8k off the purchase price. (Better than a buydown.)

    Q:

    If we're putting 7 combined pts down up front, can we get a better rate.

    A:

    Sorry to say it, but it is a ludicrous financial decision to pay 7 points to buy a rate down. It will take you about 15 years to break-even! Ouch! You will either re-fi, move, pay it off, or die first. And, we didn't even talk about the opportunity costs -- if you put the 7 points (14,000) in an investment, it will be worth $56,000 in 15 years. You'll just be recapturing the $14,000 you put out in points.

    The only time I suggest a buydown to someone is when they HAVE to do it to qualify for the loan.

    DANIEL BROUSE
    e-mail brouse@membrane.com
    (800) 783-9333 x192
    (610) 397-0330 x192
    Beeper 215-960-5556

    Mortgage Pre-Qualification
    Mortgage Application Information
    Page back to last month.




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    Search this website:

    Home | Contact The Help Desk | Advertise Here

    The Interesting Points of a Mortgage Buydown
    Click Ahead in Time

    Interest Rate Trends

    As you can see on the graph below, interest rate trends have no course. There is volatility in a small range of rates. For instance, the 30 year fixed rate mortgage, with 0 points, has been between 7.625% and 8.25%. Historically speaking it is not a bad rate in either case. The risk can be eliminated even further by locking-in and floating down. For now the market appears to be waiting for a sign.

    An Interest-ing Question

    Q:

    I had a small question to ask so I mailed it electronically for your convenience and safety. We're considering a the purchase of a house with a mortgage amount of about $200,000. It has potential, but will need about 10k of work (if we get it.)

    The sellers are featuring a mortgage "buy-down" worth up to 4pts. Currently, the real estate company says we can get a mortgage at 61/4% if we put down an additional 3pts and use their services. What the heck's going on?

    A:

    A buydown is a temporary solution ... that is why it is called a "temporary buydown." What you are doing is putting a large chunk of money (in this case about $8,000) into a fund (called a buydown subsidy) at the bank. For the first two years, the bank takes some of the money out of the fund each month and helps you make your mortgage payment. Your mortgage and note rate are always the same (in this case 7.5%) It only feels like an interest rate of 5.5% the first year and 6.5% the second year.

    Q:

    Is there a catch with the buy-down? Can you get us a buy-down?

    A:

    Yes, I can do the exact same thing (or better). Is there a catch ... yes. It is probably not the best use of your money. If you could use the $8,000 any way that you wanted, would you choose a buydown? I wouldn't. I would either:
  • Buy the rate down permanently (like use the money towards points on a 30 year fixed rate). This is still not the smartest thing to do.
  • Use the money toward my other closing costs. This is what I would do. Keep control of the money.
  • Take 8k off the purchase price. (Better than a buydown.)

    Q:

    If we're putting 7 combined pts down up front, can we get a better rate.

    A:

    Sorry to say it, but it is a ludicrous financial decision to pay 7 points to buy a rate down. It will take you about 15 years to break-even! Ouch! You will either re-fi, move, pay it off, or die first. And, we didn't even talk about the opportunity costs -- if you put the 7 points (14,000) in an investment, it will be worth $56,000 in 15 years. You'll just be recapturing the $14,000 you put out in points.

    The only time I suggest a buydown to someone is when they HAVE to do it to qualify for the loan.

    DANIEL BROUSE
    e-mail brouse@membrane.com
    (800) 783-9333 x192
    (610) 397-0330 x192
    Beeper 215-960-5556

    Mortgage Pre-Qualification
    Mortgage Application Information
    Page back to last month.