Understanding Mortgage Points and Buydowns

Buydown

• A buydown occurs when funds are provided to the lender by the borrower or a third party for the purpose of reducing the borrower's monthly out of pocket payments.

• To lower the interest rate 1 full percentage (7% down to 6%), one must pay 8 discount points which is equal to 1% of the loan's value.

• For a $100,000 loan with a quoted interest rate of 7%   1 discount point (1/8 or or .125%  of loan value) will cost the buyer $125 and will lower the interest rate from 7% to 6.875%.  To lower the interest rate from 7% to 6% would cost the buyer $1000.

Interest Rate

• The available interest rate varies upon factors such as:

  • the size of the loan (the higher the loan, the lower the possible interest rate) 

  • the individual's credit score (higher credit score, lower possible interest rate)

  • factors of the loan such as delivery date, down payment options and cash out options 

Payment Savings

• On a $100,000 30-year loan, every quarter percentage point reduction in the interest rate saves a home buyer about $250 annually in payments.