When shopping and attaining a loan, the potential home buyer does have some control over the interest rate. The way the potential home buyer can have this sort of control is through a rate buy down which will essentially lower the monthly payment.
The easiest way to buy down your mortgage rate is buying discount points. Each point is 1.0% of your mortgage amount and reduces your mortgage rate by 0.25%. For example, if you are offered a 6% interest rate on a $100,000 loan, you can pay one point ($1,000) to get a 5.75% interest rate instead. You can buy down your interest rate by up to 1.0% to reduce your interest costs and get a lower payment.
Before the potential home buyer chooses a rate buy down, the home buyer will need to do a little homework and planning first. The potential home owner will want to be sure that he or she stays in the home for a decent period of time. Also, the home buyer will need to compare the monthly savings with how long he or she plans on owning the home. Essentially, the homework part comes into play in figuring out how many months it will take to break even? The longer the homeowner stays in the home, the better the rate buy down will pay off.
A mortgage rate buy down can also be known as a 3-2-1 buy down. This type of buy down will be beneficial for homeowners who expect their monthly income to increase. With this type of buy down, homeowners can expect a lower payment for the duration of 36 months. After 36 months of lower payments, the payment will increase. This 3-2-1 rate benefits homeowners who have a 30-year home loan with an interest rate that increases 1.0% per year for the first three years. That is why the mortgage payment will be lower. A homeowner can also be given the option of a 2-1. A 2-1 buy down is essentially the same as a 3-2-1 buy down. The only difference is on a 30-year mortgage, the rate goes up after the first 2 years rather than 3 years.
Doing a rate buy down is usually a better option than an adjustable rate mortgage that allows for negative amortization like an option ARM. The monthly mortgage payment will always have interest and principal along with many other policies like PMI or homeowners insurance.