A buydown involves using money to get a lower interest rate on a loan. This is known as buying points. When a lender offers you 5 percent interest rate with two points, you are basically giving money up front in order to get a lower interest rate.
When you buydown a mortgage by purchasing points, you are paying interest up front to guarantee a lower rate. A point is equal to one percent of the loan amount. One point also typically lowers the interest rate .25 percent. Let’s say a lender offers you a $150,000 loan with a 7 percent interest rate. However, if you will buy two points, the interest rate becomes 6.5 percent. This will cost you $3,000 since that is two percent of $150,000. The $3,000 is paid at closing.
Whether or not it is wise for you to buydown your mortgage depends on how long you plan to be in your house. If, for example, you know that you are going to be transferred in two years, then buying down your interest rate does not make sense. If you can be pretty confident that you will remain in the house for the long term, then buying points may be right for you.
Realize when a lender offers you a low interest rate but with points, you are still paying that interest, but you are just paying it at closing. If you plan to be in the house for many, many years, then that may be a good idea. If not, then accepting a slightly higher interest rate without a buydown may actually end up saving you money.
