Should I Buy Down My Mortgage Rate When Buying a Louisville Home?

By Tim Hollinden, Broker Associate | The Hollinden Team at eXp Realty

Quick Answer

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Buying down your rate means paying more up front to get a lower interest rate or lower early payments. It comes in two forms:

• Discount points permanently lower your rate for the life of the loan.
• A temporary buydown lowers your payments for an initial period, often the first year or two.

Whether either one makes sense usually comes down to three things, weighed together:

• What it costs, and whether you can comfortably afford that
• Who's paying for it: you, the seller, or a builder
• How long you realistically expect to keep the loan

There's no single right answer. Before you decide, ask your lender for complete quotes with and without a buydown.

What You'll Learn

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• The difference between a permanent buydown and a temporary one
• The three things to weigh together: cost, who's paying, and how long you'll keep the loan
• When paying for points tends to make sense, and when I'd be cautious
• What to know before you rely on a temporary buydown
• How the question changes when a seller or builder is paying
• Where to find buydown costs on your Loan Estimate

Tim's Take

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When buyers hear "lower rate," most of them want it. I get it. The rate is the number everybody watches.

I'd slow that down a little. A lower rate always costs somebody something. So before I'd decide whether a buydown makes sense, I want to know three things:

• What does it cost, and can you comfortably afford it?
• Who's paying for it?
• How long are you likely to keep this loan? Not the house, the loan.

Those three answers usually tell you more than the rate itself.

Two Different Things Called a "Buydown"

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People use the word "buydown" for two very different things, so it helps to separate them.

A permanent buydown usually means paying discount points at closing. One point costs 1% of your loan amount. In exchange, the lender lowers your interest rate for the life of the loan. How much the rate drops per point varies by lender, by loan type, and even by day, so there's no standard answer.

A temporary buydown works differently. Money is set aside at closing to lower your payments for an initial period, often one or two years. After that, your payment goes up to the full rate on your loan. A 2-1 or 1-0 buydown is a common example, but they aren't the only structures. Your actual interest rate never changes. Someone just paid part of your early payments in advance.

Both lower what you pay at first. Only one keeps working for the life of the loan.

Three Things to Weigh Together

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What it costs, and whether you can comfortably afford it. Points and buydown funds are real money at closing, on top of your down payment and closing costs. A lower rate isn't much of a win if paying for it leaves you without a cushion after you move in. If the cost would stretch you, that alone may answer the question.

Who's paying for it. Spending your own money to lower your rate is one decision. Having a seller or builder pay for it is a different one, because then the question becomes where their money does you the most good. I cover that below.

How long you'll keep the loan. With points, you pay up front and get a little back every month in a lower payment. It takes time for those monthly savings to add up to what you paid. If you sell or refinance before then, you paid for savings you never got to collect.

No one of these settles it alone:

• A buydown someone else pays for can still be the wrong use of their money.
• A buydown you can afford can still be a poor fit if you won't keep the loan long.

The answer comes from looking at all three together.

A good lender can lay this out for your specific loan. The Consumer Financial Protection Bureau suggests comparing quotes with and without points over your shortest, longest, and most likely timeframes. I think that's a sensible way to look at it.

When Paying for Points Tends to Make Sense

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You expect to keep the loan a long time. If this is a home you plan to stay in and you're not counting on refinancing, a permanently lower rate has years to pay you back.

You have cash to spare after everything else. If you can pay for points and still keep a healthy cushion in the bank, they may be worth a look.

Someone else is paying. If a seller or builder is putting money toward your purchase, a rate buydown is one of the ways that money can be used. More on that below.

When I'd Be Cautious

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When paying for points would drain your savings. I'd rather see a buyer close with a cushion than spend their last dollars lowering a rate. Unplanned expenses tend to show up in the first months after you move in, and a slightly lower payment won't cover a surprise repair. That's part of thinking about how much house you can really afford.

When you're planning to refinance if rates drop. If your plan is to buy now and refinance later, paying a lot to lower today's rate can work against that plan. When you refinance, the money you paid for points stays spent. I talk about the buy-now-or-wait question in Should I Wait for Mortgage Rates to Drop?

When you may not stay long. If there's a real chance you'll move in a few years, the monthly savings may not have time to catch up.

When a temporary buydown is the only reason the payment works. This is the one I watch most closely. More on it next.

Temporary Buydowns: Helpful, but Know What You're Buying

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A temporary buydown can genuinely help. The first year or two in a new home often comes with extra expenses: moving, furnishing, a few things you'll want to fix. Lower payments during that stretch can take some pressure off.

But the payment that really matters is the one you'll make once the temporary help runs out. If that full payment would be a strain, the buydown only delays the problem.

On many loans, including conventional loans that follow Fannie Mae's guidelines, you have to qualify at the full rate anyway. Your lender can confirm how that works for your loan. Either way, I'd want you comfortable with the full payment, not just the reduced one.

I'd also be careful about counting on a future raise or a refinance to make the later payments work. Both might happen. Neither is guaranteed.

One more practical question to ask: if you sell or refinance before the buydown period ends, what happens to any money that hasn't been used? That depends on the buydown agreement, so ask before closing, not after.

When the Seller or Builder Is Paying

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This is where buydowns come up most often in real negotiations.

A seller can often put money toward a rate buydown instead of toward your closing costs or a lower price. That money still counts toward the limits on what a seller can contribute, which I explain in What Can Louisville Homebuyers Ask a Seller to Pay For?

So the real decision is how to use the same dollars:

• off the price,
• toward your closing costs, or
• toward your rate.

Each does a different job. I walk through the price-versus-credit side of that in Price Reduction or Seller Credit: Which Helps a Louisville Buyer More?

With new construction, rate incentives are common. Having been a builder myself, I understand why. A rate incentive helps the buyer's payment without lowering the sale price, and that sale price becomes a comparable for the next home in the neighborhood.

Builders often tie their best incentives to their preferred lender. That can be a good deal, but I'd compare the whole package (rate, fees, and terms), not just the advertised rate. More on that in New Construction Builder Incentives in Louisville.

Look at the Loan Estimate, Not the Advertised Rate

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A low advertised rate tells you very little unless you know what it costs. Your Loan Estimate shows both:

• Discount points appear on page 2, in Section A.
• Lender credits, the reverse of points, appear on page 2 in Section J. With a lender credit, you take a slightly higher rate in exchange for lower closing costs.

That reverse option is worth knowing about. If cash to close is tight, or you don't expect to keep the loan long, taking a lender credit can make more sense than paying points.

When you compare, make sure each version uses:

• the same loan amount,
• the same loan type, and
• quotes from the same day.

That way you're comparing the buydown itself, not differences in the quotes.

Frequently Asked Questions

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Bottom Line

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Buying down your rate can be a smart move, or it can be money spent on savings you never collect. The deciding factors usually aren't the rate itself. They're what the buydown costs and whether you can comfortably afford it, who's paying for it, and how long you'll realistically keep the loan.

Ask your lender for complete quotes side by side, look at the full payment rather than just the reduced one, and choose the structure that fits your plans.