Buydown of mortgage rate

kate38February 22, 2012

Within a month, we will be ready to convert from construction to permanent loan. So far our loan process has been trouble-free. Our mortgage rep at the bank just gave us today's rate and let us know that we can buy down the rate for certain dollar amounts. We are not familiar with how buydowns work and would like to hear actual experiences in addition to the banker's opinion. If anyone here has done it, would you kindly explain how this works and why would one do it? How do you figure out if it makes sense in the long run? We plan to stay in this house at least 10-15 years.

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I recommend checking out for an easy wealth of information on this topic--or even call in to the show any weekday between 1 & 4pm EST.

Also, for a quick calculator and explanation you can try the link below.

Here is a link that might be useful: Buying Down A Mortgage

    Bookmark   February 22, 2012 at 2:28PM
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Buying down comes down to how long you plan on paying on the mortgage.

If you sell or refinance before you recover the points you paid more than you otherwise would have.

A complete analysis needs to include the effects of inflation in a long term calculation, and at that point the calculations start getting more complicated with greater uncertainty (you have to estimate what inflation is going to do at periods farther and farther into the future).

Usually the uncertainty makes the longer term estimates very unstable.
A small variation in the inflation estimate can completely change the results, making them more uncertain.

One of the key things for calculations like this is to assess how far off things like inflation estimates have to be before the answer changes (AKA 'sensitivity analysis').

    Bookmark   February 23, 2012 at 11:01AM
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