Buying down an interest rate is the buzz word of late. The comparison chart above shows how impactful interest rates are on the monthly note. An interest rate at 6.64% v. 5.5% is a monthly difference of $206 per month. A total of $2472 each year in interest payments along. That $206 payment per month applied to an interest rate forces Buyers to decrease their overall sale price when looking for a home.
So, what is buying down an interest rate?
What does it mean?
How can it apply to you?
Who pays for it?
Interest rates have gone up by 75 basis points more than once over the past year. This puts Buyer’s leveraging power at a disadvantage. Buying power goes down when interest rates go up, because now instead of being able to purchase based on sale price or home size (price/sq ft) the Buyer must purchase based on the amount of interest rate paid within the overall total amount of the monthly mortgage.
There is an option to buy down interest rates in a lump sum amount up front before closing, which can be paid from either the Buyer or the Seller in the form of concessions. Historically, Sellers would offer concessions in the form of contributing toward closing costs or money in lieu of repairs. Now Sellers can offer money toward buying down a Buyer’s interest rate. Buying down an interest rate ensures that you get a rate lower than the current interest rate market and is fixed at that point until you refinance.
Buyers can buy down their own interest rate before they even begin home shopping to ensure they get the interest rate that fits into their monthly mortgage budget.
Negotiating where the money comes from to buy down the interest rate can happen during the offer process, though to ensure the Buyer gets the exact buy down they need I always advise my clients to buy down their own interest rate before home shopping if possible.
Interested in knowing what your rate would be today? Here’s a few resources I consult on a daily basis to check daily rates.
A favorite resource is Bankrate which can show you the trends through a graph comparing the different loan products.
Compare rates among loan types specific to the state of Louisiana here.
Forbes updates daily rates among top national lending institutions here.