Buydown: A Way to Reduce Interest Rates
This short article will provide insight into what points are and how they can affect your interest rate and your monthly mortgage payment.
Mortgage lenders typically offer consumers an interest rate where little or no points will be paid to obtain the rate. This is also known as the par rate. Points are typically termed discount points with one point equating to 1% of your mortgage amount. For example, if you had a $100,000 mortgage and paid 1 point this would cost your $1000. Think of points as prepaid interest. When you pay a point, it typically will reduce your interest rate by .25 – .375% over the term or life of your mortgage. This money from points is paid at closing and you benefit with a lower interest and lower payment over time.
Typically, you will only consider points if you plan on being in the mortgage for at least 3 years.
Some lenders try to charge origination points also at closing. These points you want to avoid because they are typically income directly to the mortgage lender to help pay for the processing and manufacturing of the loan.
Paying discount points may also benefit you when you file your tax returns as well as they are eligible for a deduction. You should always consult to tax preparer to be certain.
As always, work with a reputable mortgage Home Loan Advisor at Hall Financial to ensure you fully understand your options and whether paying points make sense for you.