Buying Down Your Interest Rate

May 28, 2017 by

Buying Down Your Interest Rate

It is no secret that interest rates are on the rise. In 2017, the rates have gone up a half a percentage point so far and the expectation is that they will continue to go upwards if the economy picks up. So, the question becomes whether buying down your interest rate on the mortgage is a good idea? Before you make your decision, here are a few factors to consider first.

How to Buy Down Your Interest Rate

To bring down your rate means paying extra fees, improving your credit report, or underwriting that can bring down interest levels. The easiest is to pay extra at closing which may bring down the rate you pay by a few tenths of percentage points. Two-tenths of one percent may not sound like much, but it will save you thousands of dollars over the course of a thirty-year mortgage.

Calculate the Rate

To know whether you should buy down your rate, you’ll need to calculate the savings on your monthly interest to repay the total cost in terms of points. A good rule of thumb is that you should pay down the points if you plan on staying in the home for longer than four years. However, you should also consider that getting a five-year adjustable rate mortgage makes no sense over a thirty-year fixed mortgage.

Any Issues with Buying Down Rates?

You’ll want to go over with your lender how long it will take the savings of paying down points to the repaying of points so you understand how valuable lowering the rates will be. The longer you stay in the home, the more profitable for you it will be.

However, if the interest rates should drop for some unexpected reason, then you may need to refinance which may interfere with the savings that you initially were paying. This is based on the possibility of interest rates going down which is a calculated one in this economy.

Are Rates Going Up?

The answer is yes. All indications are that the Federal Reserve will raise interest rates in the foreseeable future. This will affect lending rates which means that your mortgage rates will be affected as well unless they are fixed already. If they are not fixed, then you may be looking at interest levels that may go up gradually or sharply depending on the economy.

Is the Rate Buy Down Accurate?

There is federal law which requires a loan estimate to be granted within 72 hours of completing your loan application. This estimate will show you the cost of the loan and the percentages for the amount of the loan with the points being quoted. You’ll even know the dollar amount of the points.

Another reason to move on buying down rates is that lenders have a 43% threshold for income to pay for housing and non-housing related bills each month. If the higher rates push you over that threshold, you may not get the loan you want unless you lower the rates.

Buying down your interest rate offers definite advantages if you are staying in your home for an extended time. With rates currently projected to go up, you should seriously consider buying down to save money for the long term.

 

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