"Buydowns" - Interest Rate Reduction

A buydown is basically paying a fee (buying) to reduce (down) the interest rate and/or payments on a mortgage. For example, a Lender may offer a rate of 6.75% with no "points," with the option of paying 1 "point" (each point is represented by 1% of the loan amount) to receive a rate of 6.375%. Ask your mortgage broker about buying down your interest rate and see what sort of savings you will receive in the long run.

When you are buying down your interest rate, it is listed as a "discount" fee on your Good Faith Estimate. This discount fee is fully tax deductible and you should seek professional tax advice on how you can take advantage of this tax write-off when you refinance your loan.

Different lenders have different buydown schedules. For instance, some lenders will charge you 1 point (1%) to buy down the rate 1/2%. Others may charge 1 point to buy down the rate by only 1/4%. Check with your loan officer for advice on these options.

When considering buying down your interest rate talk with your mortgage professional to see if buying the interest rate down will be worth it to you and in your best interest. Since the average American homeowner sells or refinances on average every 4 years or so, sometimes it does not make a lot of sense to spend the extra money to buy down the interest rate.