Should I Buy Down My Interest Rate?

With interest rates on the rise, does it make sense to pay extra money to buy down my interest rate?

 The answer to that question is “yes” and “no”. Here are our thoughts: 

ASK THE SELLER TO PAY: With Lane County’s housing market shifting, we are finally coming out of the exhausted ‘bidding war’ frenzy.  This is long-awaited, great news for buyers, and puts them in a position to do a little more negotiating with sellers.  Let’s not over embellish this; currently we are seeing a softening in our seller’s market.  Buyers won’t be able to negotiate the moon, but we are starting to see sellers give a little in price & seller credits to closing costs.  One thing a buyer might choose to do is ask for the seller to pay some closing costs in which the buyer can use these funds to buy down their rate. Buyers will want to know ahead of time how much to ask for, but a good general rule of thumb is 1% of the sales price. 

WHAT DOES IT COST? Buying down the rate comes at a cost that varies with lenders and the daily rise and fall of interest rates.  Some days it will be a lot more cost effective than other days.  This is an impossible cost to gauge from the outside, so buyers should definitely have a lender who can monitor this for them on a day to day basis.  Your local professional will be able to provide you with critical information and allow you to decide when is the best time to lock & buy down the rate. 

2/1 BUY DOWN:  Lenders also give buyers the option to do a temporary buy down of the rate.  Let’s say the interest rate today is 5.5% for a 30 year fixed mortgage.  With the 2/1 option, the rate will be 3.5% year one, 4.5% year two, and then 5.5% the remaining years of the loan.  This allows a buyer to ‘ease into their payment’.  

BREAK EVEN POINT:  There will always be a break even point to calculate.  If it costs $4,800 to buy down your rate, and the saving with the new rate vs. the non-buy rate comes out to $100 per month- then your break even point is 48 months (4800/100).  If you, as the buyer, has a short term game plan of owning the home for 2-4 years, you might rethink buying down the rate and applying the $4,800 towards reducing the sales price instead. 

All in all, buyer’s have options.  And these options may even be able to be negotiated with sellers.  It’s refreshing, good news!