Buying a home is an important and significant investment. The ultimate decision to realize the goal of new home ownership is the combination of many related decisions, including how to finance all, or a significant portion, of the purchase. Obtaining a mortgage to finance the purchase is an essential part of the new home buying process and a financial transaction that many customers will complete only a few times in their lives. It is important for buyers to partner with a trusted advisor and licensed mortgage professional who is skilled in new construction purchase finance. Homebuyers should obtain answers to their questions so that they may proceed with confidence in the financial investment they are making.

One common question asked is, “What is my interest rate?” The interest rate associated with the loan is an essential term of the loan that will affect affordability determinations, the buyer’s budgetary decisions and, perhaps, loan qualifications. The interest rate is a key determining factor in the monthly payments to be made during the loan term and therefore a very important factor to consider when making a new home purchase. 

Mortgage rates rise and fall over time based on market and general economic conditions. Rates also vary based upon loan type, loan program and loan amount. While the market ultimately drives available mortgage rates, there are financial decisions and investments that both buyers and sellers may make to alter or reduce mortgage rates. The good news is that these choices give buyers some level of control over the ultimate note rate associated with their mortgage loan and, therefore, enable buyers to manage the monthly loan payments they will make in the future after closing on the purchase of their new home. A mortgage rate buy-down is one such choice and investment that buyers and sellers may make to alter and lower the note rate associated with a mortgage loan.

A buy-down is the decision to pay an upfront cost at loan closing to lower the interest rate. This upfront cost is commonly referred to as a “discount point”, “mortgage point”, or “pre-paid interest point”. Buy-down payments may be made upfront at the loan closing to alter and reduce the rate either permanently for the entire loan term (e.g. permanent rate buy-down) or temporarily and for a limited portion of the loan term (e.g. temporary rate buy-down, 2/1 buy-down, 3/2/1 buy-down). Each point paid to reduce the note rate is equivalent to one-percent of the loan amount and may be paid as whole or fractions of a percent, depending upon the extent to which the buyer (borrower) seeks to reduce the note rate.

The amount of the total buy-down cost at closing varies depending upon the amount of the loan and the extent to which the buyer (borrower) wishes to reduce the note rate, as well as whether the rate is being reduced and lowered permanently or temporarily. A licensed mortgage professional is able to advise and counsel buyers (borrowers) on the available options and choices, and their associated costs and benefits, in terms of monthly loan payments going-forward. The goal is to apply costs paid at loan closing to achieve the desired note rate and, therefore, monthly payment so that it aligns with the buyer’s (borrower’s) financial goals and home ownership budget. Important factors such as purchase price, down payment, loan amount, loan term and loan program are key determining factors that also affect monthly payment, but note rate is one important factor that a buyer (borrower) may invest in. So, making an up-front payment at loan closing to alter and lower the note rate is a valuable technique that buyer’s (borrower’s) may consider to produce a monthly payment that aligns with their financial and budget goals even when market rates are higher or on the rise.

Buyers or sellers may pay for the costs of the buy-down depending upon amount, loan program and other factors. When a seller such as a homebuilder pays discount points on behalf of the buyer (borrower) to reduce their note rate that subsidy at closing is referred to as a “seller concession.” The amount that a seller may contribute on behalf of the buyer (borrower) at closing is limited and those limits vary depending upon purchase price, loan amount and loan program. However, it is generally the case that a seller may contribute all or a portion of the cost to buy-down the note rate at closing in order to incentivize and support the buyer’s (borrower’s) purchase of the new home.

Seller concessions should be negotiated between the buyer and seller at the time of contract. Any negotiated concessions should be included within the contract terms and are best finalized with the advice of a licensed mortgage professional so that all parties may be assured that the terms are acceptable and will, in fact, achieve the desired outcome for the buyer (borrower) upon and after closing. Communication and planning are the keys to success when negotiating seller concessions.

The great news is that buyers do have the ability to make choices and investments at closing to exert some control over the note rate applicable to their mortgage loan. By taking time to explore these options and techniques with a skilled mortgage professional, buyers can achieve their new home purchase goals within their budget and financial plan and may proceed with confidence.

This blog was authored by Jeff Berger of Groundwork Mortgage. Groundwork is one of our preferred lenders and is Jeff is an expert in the industry. For more information on Rate-buy downs and to see if you qualify, call us today at 816-228-1188.