Buying a house requires a lot of money, and raising a home loan increases this money requirement. Because when a home loan comes into the picture a buyer not only pays for the house but also for the privilege to use the loan money. In situations like these, taking up a mortgage with a lower interest rate could help you save money on monthly interests and the closing cost.
Interest rate buy-down plans are mortgage loans where the borrower has to pay a lower interest rate than the interest rate of the conventional loans. The borrower can obtain such loans by paying discount points, also known as mortgage points. It is a one-time fee that the borrower pays upfront to lower the interest rate of the loan. In other words, it is a prepayment of the interest to get lower interest rates for the remaining tenure of the loan.
There are numerous loans and lenders out there offering incentives for you to borrow from them. However, shopping around can help you figure out the cheapest method to raise the loan.
Some of the key features of Interest rate buy-down mortgage plans are:
Every discount point that you decide to pay upfront costs 1% of the total loan value. The reduction in the interest rate for each point varies from lender to lender.
Different plans offer different rate buydowns. Some plans have lower interest rates in the first year and it keeps increasing every year until it matches the interest rate on the conventional loans. In other plans, a discount point offers you a lower interest rate for the entire tenure of the loan.
Based on the arrangement between the buyer and the seller, in some cases, the seller may pay for the discount points on the buyer’s behalf.
When the seller pays for the discount points, they do it to incentivize the buyer to buy their property. They can however choose to add the subsidy to the purchase price of the house.
Make sure to figure out the break-even point before deciding to buy down your loan. It is the time it will take for you to regain the discount points you have paid. And if you plan to resell the house before the break-even time, buying down the loan may not be a good idea.
