Discount Points And Buydowns



Discount Points And Buydowns

Discount Points And Buydowns
By paying extra at​ the time of​ closing you may be able to​ reduce the interest rate on your loan – or​ buy-down your interest rate .​
The buydown can affect your interest rate temporarily or​ permanently with the use of​ discount points.
Temporary Buydowns
Borrowers pay interest payments in​ advance to​ reduce the interest rate of​ the loan for the first 2 or​ 3 years of​ the loan .​
One common type of​ temporary buydown is​ the 3-2-1 buydown which lowers the loan rate by 3% the first year, 2% the second year, and 1% the third year .​
The primary advantage of​ a​ temporary buydown is​ that the borrower may be able to​ qualify for a​ larger loan with the first year’s reduced rate, and if​ the borrower expects his or​ her income to​ increase, then the larger future payments may not be a​ problem.
Permanent Buydowns
Borrowers can pay for discount points to​ reduce the interest rate for the life of​ the loan .​
a​ discount point is​ equivalent to​ 1% of​ the loan amount, for example, with a​ $100,000 loan, one discount point would cost $1000 .​
It usually requires 4 to​ 6 discount points to​ lower the rate by a​ full percentage point .​
This can be an​ effective way to​ save you money, but it​ depends on how long it​ takes to​ recoup the cost of​ the discount points .​
To see if​ this will make cents for you, consider the following example:
A $100,000, 30-year mortgage with 0 discount points will have a​ rate of​ 7.5% – resulting in​ a​ monthly payment of​ $699.21 .​
Or, the lender suggests you buy 2 discount points and the rate will be reduced half a​ percent to​ 7.0% .​
For this option, the cost of​ the discount points is​ $2000, and the monthly payment will be $665.30 .​
This would save $33.91 each month .​
Divide the cost of​ the discount points by the savings each month and it​ shows that it​ will take 59 months to​ break even for the cost of​ the points .​
If you are keeping the property for 5 years or​ more, then this would be a​ good option.
Discount points and buydowns can be a​ great way to​ save money – but do your homework to​ see that it​ makes money for you, not just your loan officer.

Discount Points And Buydowns





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