What is an Interest Rate Buydown?

Interest Rate Buydown and Interest Rate Symbol

Should I Buydown My Interest Rate?

Interest rates are low, so what is the benefit of buying down my interest rate? A buy down is beneficial because when you buydown an interest rate, you are paying a one-time fee to lower your interest rate for the life of your fixed-rate loan (learn more about loan types). This can also help lower your monthly payment for the rest of your loan.


What Is A Buydown On A Mortgage?

A buydown is paying discount points at closing to lower your interest rate. What are discount points? Discount points are also known as prepaid interest points, or mortgage points. They are a one-time fee that you pay to lower your interest rate. For fixed-rate loans, this is a permanent lowering of the interest rate.


How Are Buydowns Structured?

Buydowns can be arranged in a variety of ways:

  • 1-0 Buydowns: A temporary 1-0 buydown lowers your interest rate by 1% for the rest of the loan for the first year.
  • 2-1 Buydowns: A 2-1 buydown provides a discounted interest rate for the first two years of the loan’s term. The interest rate would be 2% lower the first year and then 1% lower the second year.
  • 3-2-1 Buydowns: After obtaining the loan, a 3-2-1 buydown enables buyers to pay less interest on their mortgage for a period of 3 years. Points initially paid reduce the interest rate by 1% (for each of the 3 years).


How Much Does It Cost To Buy Down An Interest Rate?

Each discount point a borrower pays is 1% of the mortgage amount for a roughly 0.25% decrease in the interest rate. “Buying points” does not always mean exactly 1% of the loan amount. A lender can sometimes allow the borrower to pay 0.5% of the loan amount reducing the interest rate by .125%. Each lender sets the amount for how much buying discount points reduces the rate.


Should I Buy Points to Lower My Interest Rate?

Whether you should buy points comes down to whether you can afford them and how long it will take to recoup the cost of the points. For example, if you’re lowering your interest rate .5% at a cost of $2,000 in points to save $50/month, it will take 3.3 years to break-even by purchasing the points.


Need Help Deciding Whether to Buydown Your Interest Rate?

Give us a call at Mortgage Craft and we will talk through with you if buying down points is a good fit for you and your budget! Our number is 717-560-0546 and our advice is always free!

More to explore

Contact Us!

Want to take the next step in buying a home or refinancing? Fill out a quick form and pick the best time for us to call you!