And is it right for you? In this blog post, we will share all of the information you need to know about buying a lower mortgage rate. By the end of this blog post, you should know whether it is the right decision for you or not. If you are able to buy a lower mortgage rate, you can save a lot of money. Let’s calculate it below!
The interest rate on your home is arguably one of the most important details of purchasing your home – as it affects you for years to come. You will be dealing with interest rates that are into the six figures and it is important to ensure you get the best rate that you can.
When you are buying a home – you can purchase what’s called “Mortgage Points” or what is known as prepaid interest points. This usually means you are paying a little more at the closing table to get a lower interest rate overall.
How do you calculate points?
1 point is equal to 1% of your total loan amount.
A Real Life Example:
Let’s say you are offered a 30 year fixed mortgage loan at $200,000 with a 4.25 percent interest rate with no points. Your monthly payment would be $983.88.
If you added 2 points, ($4,000) you might be able to drop the interest rate down to 3.75 percent. This gives you a monthly payment of $926.23. This saves you $57.55 a month. It would take you 69 months, or 5 years and 9 months to pay this $4,000 back. If you know that you will be living in your house for more than 5 years and 9 months, buying your rate down is a good idea and will save you money. .
Pros and Cons
1. You will save money on your monthly payment and overall interest rate.
The biggest pro is not paying interest over time that isn’t necessary to spend. If you can more for up-front principal, why wouldn’t you? Even just $30-$50 a month adds up in big numbers over a 10 or 15 year loan!
2. The up-front costs of buying your rate down could be not feasible for you.
With closing costs, down payments and other additional expenses that come with moving, it might be too much adding up to add mortgage points to the mix. You don’t want to tap yourself out or stress out your finances.
3. Mortgage Points are the most beneficial if you plan to be in your home for a while.
This is the case for most long term savings strategies. If your thinking of selling your home way before the your loan term is up – you probably won’t save as much money, and buying your rate down could be ineffective.
There is a way to specifically calculate whether it is worth it for you or not to buy your rate down. You can calculate this number by dividing your monthly savings by the cost of your reduced rate. In the above example, you would save $30 a month by paying $2000. This comes out to 67 payments to break even, aka 5 and a half years. At that time, you can think to yourself whether you intend to be in your home for that long.
Situations Where Buying Your Rate Down is A Good Idea
- You have plenty saved up for the initial cost of moving and can afford a higher move-in cost.
- You intend to stay in your home for a long time – at least well into the length of your mortgage.
Use the calculation we gave you above to see if when you break even lines up with how long you intend to stay in your home.
- You have more than 20% equity in your home.
If you have less than 20%, you will be paying private mortgage insurance to cover your lender in the event that you default on your property. In this case, it could be worth it to spend that extra money on your downpayment instead of buying your rate down. Talk to your lender about these options and see which one is right for you.
Should You Buy Your Rate Down?
If you have the extra funds at the beginning of your mortgage, along with a fixed rate loan and you plan to be in your home for a long time, it could go a long ways in helping you save money for the things that really matter. Talk to your lender today about these options.