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Buydown: A Way To Reduce Interest Rates

ADVICE Josh Taylor. October 29, 2024

A buydown is a way for a borrower to obtain a lower interest rate by paying discount points at closing. Discount points, also referred to as mortgage points or prepaid interest points, are a one-time fee paid upfront.

A buydown mortgage works by allowing you to buy points (sometimes referred to as discount or mortgage points) upfront in exchange for a lower interest rate.
The cost of a mortgage point is based on the size of your mortgage loan, with one point representing 1% of your mortgage. For example a $500,000 mortgage, one point would equal $5,000, two points would equal $10,000 and half a point would equal $2,500.

Ask the seller to pay. A ideal negotiation tactic perfect for the current market.

Pay cash. If you have an extra stash of cash, you can use it to pay for a lower rate. However, you should make sure that you’ve done the break-even math first.

Use a builder closing cost incentive. Homebuilders may offer financing incentives if you use their “in-house” mortgage company. You can typically use the funds to cover closing costs, including buying down your rate.

Gift funds. If you’re receiving a gift from family or a close friend, you may be able to apply the gift funds to a mortgage rate buydown.

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