Should I buy down the rate?
We receive many questions about what is buying down the rate and is it worth it? The concept of buying down the interest rate is a way to give the lender an advanced interest at current cost. In order words, the present value of money.
For example, let’s say you have an interest rate of 4.5% but you are comfortable paying on a rate of 4.125%. In exchange for the lender to give you the 4.125%, the lender would charge you points, (A point is equal to one percent of the loan amount), or advanced interest on the loan for the lower rate. It will cost more money upfront, but you will lower your payments long term. Makes sense?
So, is it worth it for you to buy down the rate? I like to make this very simple with a math calculation:
- A = Cost to lower the rate
- B = Savings in dollars per month (Which is the difference of original rate and discounted rate)
- C = Amount of time you plan to stay in your home (in months)
- (CxB) < A = Not a good idea to discount
- (CxB) > A = Great idea to discount
If (CxB) is less than (A) the cost to lower the rate, then it is NOT a good investment.
If (CxB) is greater than (A) the cost to lower the rate, then it is a good investment.
If you have any questions, please feel free to contact us (407) 930.4490 and we will be happy to help.