Should I Pay to Buy Down My Interest Rate

How do you buy down an interest rate? When is the right time to buy down the rate? Answer these two questions and you could be on your way to saving thousands of dollars!

To start you should understand how and why you would buy down the interest rate. To buy down the rate you simply pay “points” or a percentage of the total loan amount in order to get a lower interest rate. For example on a $300,000, 30 year fixed loan you may have an interest rate of 6.375%. If you paid 1 point (or $3,000) to the bank you could roughly get an interest rate of 6.00%. While $3,000 sounds like a lot of money, and it is, over the long runs this could save you thousands of dollars! Using the same example from before if you paid the 1 point on a $300,000 loan and lowered you interest rate to 6.00% over the life of the loan you would save $26,265 – the $3,000 you paid to get the rate for a total savings of $23,265.

Now the question is “When is the right time to buy down the rate?” This is simple. Simply take the amount you have to pay divided by how much it saves you each month by buying down the rate and that is how many months until you break even with your cost to buy the rate down. If you plan on keeping the mortgage longer then it takes to break even then you will save money! In the example above it would take 44 month to break even. Everything after that is money in YOUR pocket!