Should You Buy Down Your Interest Rate? [Knoxville Mortgages]
With news of interest rates climbing this year and another rate hike expected by the Federal Reserve, you may be left wondering whether or not you should buy down your Knoxville mortgage rate.
While rates are still historically low, an increase in mortgage rates means that you’re going to be stuck paying more interest for the life of your loan. Buying down your rate can make sense in some cases while in others it may not make sense.
So, should you buy down your Knoxville mortgage rate? In this post, we’ll take a closer look at the pro and cons of buying down your mortgage rate.
First: What Is A Buy Down?
A mortgage buy down is when a borrower pays for additional fees in order to get a lower interest rate. For those getting a Knoxville mortgage who want a lower interest, a buy down allows a borrower to get that even when interest rates are slowly rising. By paying some money upfront, a borrower can avoid paying more interest over the life of the loan.
Typically, a mortgage company will allow you to buy down 0.25% of your interest rate when you pay for a point or 1% of the loan amount. For example, if you were to reduce your rate from 4.25% to 4.00% on a home and your loan amount was $125,000, you would pay $1,250 in points to reduce your rate.
What Are The Savings?
A mortgage buy down can save you money on your monthly mortgage and on the overall interest that you pay overtime. The savings that you’ll see depends on how must you buy down your rate as well as your loan amount.
To see how these cost savings can work, here is an example of a buy down:
Before Buy Down:
Loan Amount: $250,000
Interest Rate: 4.25%
Total Monthly Payment (excluding taxes and insurance): $1,229.85
Total Interest Paid: $192,745.96
After Buy Down:
Loan Amount: $250,000
Interest Rate: 4.00%
Total Monthly Payment (excluding taxes and insurance): $1,193.54
Total Interest Paid: $179,673.86
Total Buy Down Paid: $2,500
Monthly Savings: $36.31
Total Interest Savings: $13,072.10
How Long To Break Even From Buy Down (Buy Down/Monthly Savings): 34 Months
A buy down in this example would cost you $2,500. It would save you $36.31 per month and $13,072.10 in interest over the life of the loan. In order to break even from your buy down, it would take 69 months.
When Should You? And, When Shouldn’t You?
When it comes to thinking about buying down your Knoxville mortgage rate, there is a lot to consider. Before coughing up the money to buy down your interest rate, it’s important to consider if the math makes sense for you.
Buying down your rate makes sense if you plan on staying in the home. You’ll just want to make sure that you’ll be in the home long enough to recoup the money. In our previous example, you would at least need to stay the home for 69 months in order to recoup the buy down. If you do, you will end up saving money, particularly over the life of the loan.
For those borrowers who are unsure about how long they’ll be in the home, a buy down may not make sense. The savings are only worth it when you live in the home long enough to recoup the funds that you pay out at closing. While it’s great to save so much on interest, if you’re not living there to reap the benefits, it may not be worth it.
Are you interested in buying a Knoxville home for sale? If so, please do not hesitate to let us know. Rick can be contacted at 865-696-9002 or via email at Rick@KnoxvilleHomeTeam.Com. Kati can be contacted at 865-696-1888 or via email at Kati@KnoxvilleHomeTeam.Com. Also, be sure to check out our Knoxville home search page to see what homes are for sale in the area.