Is it a good idea to buy down the rate on a loan?


I am looking to buy a townhouse. I have a just above 30% down payment. The realtor suggested a rate buydown and less down payment.

How does that work? Is this a good idea?

I am lost with this topic and the agent who suggested it told me to talk to my mortgage broker for details.

Is that also known as buying points?

You are giving money up front to get a lower interest rate. Essentially pre-paying some of the interest. It can be a good move if you plan to keep the townhouse a long time and not pay it off early.

If your plan is to pay on the mortgage aggressively and get it paid off quickly it’s not a good move. Also not a good move if you don’t plan to stay there very long. If you don’t know your future plans then I wouldn’t do it.

It sounds like paying points. In my analysis when getting loans in the past it didn’t normally make sense, but it depends on the numbers for you. Basically, you would pay them money upfront to lower the interest rate which would lower your payment. But, you have to compare the upfront cost for the buydown, including the time value of that money, to the savings on your payment to see if it makes sense. In essence, you’re just giving them a little interest money upfront rather than over the life of the loan.

The major downside in heinsight is if it is wise to refinance or change houses such as a drop in rates

You can get lender credits for a higher interest rate which is the opposite of buying points but this only works if rates drop and you’d refinance the loan

At this point in the economic cycle I would not do this…I would get something like a 5/1 ARM and plan to refinance within the next 5 years. We may not be at the top yes…but we.will certainly be lower within the next 5 years. Then lock in to a longer fixed loan.