Permanent rate buydowns allow borrowers to pay up front fees at closing to lower their interest rate for the life of their loan on fixed rate mortgages.
Mortgage Buydown (Permanent)
Mortgage rate buydowns are an excellent option for borrowers to reduce their mortgage payment. In general, a rate buydown refers to paying up front fees to lower the interest rate on a home loan. Rate buydowns come in 2 varieties:
- Temporary Rate Buydown
- Permanent Rate Buydown
Permanent rate buydowns allow borrower’s to pay additional costs at closing in order to permanently reduce their mortgage interest rate for the life of their loan. The costs paid are typically referred to as “discount points”.
For example, assume a borrower takes out a 30 year fixed rate Conventional mortgage with a par rate of 6%. Assume this same borrower chooses to pay sufficient discount fees to buy the rate down to 5%. The borrower’s interest rate during the loan would be:
- Year 1 through 30: 5%
To permanently “buy” their rate down borrowers (or other acceptable parties – see below) pay fees commonly called “discount points”. Permanent rate buydowns are typically available on most mortgage products.
Permanent Rate Buydown Benefits
Borrower’s benefit from the lower monthly mortgage payments that result from buying their interest rate down. With a permanent rate buydown, the lower interest rate is effective for the life of the loan on all fixed rate mortgage products.
What Do Permanent Rate Buydowns Cost?
Borrowers can pay for their own permanent buydown costs. Additionally, other interested parties on purchase transactions may pay the borrower’s permanent buydown costs. This includes sellers and real estate agents.
The buydown cost relates to the how far the borrower wants their rate to go below par. The lower the interest rate the higher the cost for the buydown. In other words, a borrower buying their rate down 2% below par pays more in discount fees than a borrower buying their rate down 1% below par – all other things being equal.
Permanent buydown costs are not based on a fixed ratio or scale. The cost depends on multiple factors including current interest rate market pricing.