When buying a new home, there’s a lot to think about: the location, the layout, and of course, the cost. But have you ever heard of a rate buy-down? It’s a game-changer for many buyers, especially when interest rates are higher than you’d like. Let’s dive into what a rate buy-down is and why it could save you money every month!
What Is a Rate Buy-Down?
A rate buy-down is when a builder, seller, or even the buyer themselves pays extra money upfront to lower the interest rate on the mortgage. This can either be temporary or permanent:
- Temporary Rate Buy-Down: This reduces your interest rate for the first few years of your loan. For example, you might start with a lower rate for the first two years and then go back to the original rate for the rest of the loan term.
- Permanent Rate Buy-Down: This reduces your interest rate for the entire life of the loan. It’s a one-time investment that keeps paying off every single month.
In this article, we’ll focus on a permanent rate buy-down—and why it matters for buyers like you!
Real-Life Example: Buying a RiverWILD Home
Imagine you’re buying the beautiful Marin Woods home at 169 West Saltgrass Lane in Smithfield, NC. Right now, FHA loan interest rates are around 6.50% to 6.75%. However, let’s use a hypothetical scenario where the builder might offer to permanently buy down the rate to 5.99%. Let’s see what that means for your wallet:
- Loan Amount: $350,000
- Loan Term: 30 years
At 6.75%, your monthly principal and interest payment would be approximately $2,270.
At 5.99%, your monthly principal and interest payment would drop to about $2,099.
Monthly Savings: $171
Over just one year, that’s $2,052 in savings. Over five years, it’s $10,260!
A lower interest rate means you’re paying less for the money you borrowed, and who wouldn’t want that?
Why a Permanent Buy-Down Works for Long-Term Buyers
A permanent rate buy-down makes the most sense if you plan to live in your home for more than 8-10 years. Here’s why:
- A lower rate could also allow you to qualify for a higher-priced new home, opening up more options in your search.
- You Lock In the Savings: A lower rate for the life of the loan means decades of reduced monthly payments.
- Breakeven Point: It usually takes a few years to “breakeven” on the cost of the buy-down. After that, all the savings are pure benefit.
- Stability: With a permanent buy-down, you’ll never worry about your rate increasing—it stays locked in as long as you have the loan.
If you’re only planning to live in the home for a short time, a temporary rate buy-down might make more sense since it provides immediate savings without a long-term commitment. But for those ready to settle into their dream home, the permanent option is a smart investment.
Let’s Break It Down Again
Here’s a quick recap:
- A temporary buy-down is great for short-term savings and works best if you plan to sell or refinance soon.
- A permanent buy-down is ideal for long-term buyers who want stability and significant savings over the life of the loan.
In our example, the builder’s offer to permanently buy down the rate to 5.99% saves you $171 each month and thousands over time. That’s money you can put toward home improvements, vacations, or simply enjoying life in your new space.
Ready to Learn More?
Buying a home is one of the biggest investments you’ll make. At RiverWILD Real Estate, we’re here to help you understand all the tools available to make it affordable and manageable. Contact us today to learn more about this rate buy-down opportunity and find out how it can work for you!