A buy down point is a way to lower your interest rate by paying for interest upfront. An origination is often a similar mechanism used for the same purpose. You pay an upfront fee to lower your interest rate. Some lenders even include these into their quote without properly explaining them sometimes to make their quote seem better than their competition.
Do not be confused. Some loan products such as VA, USDA funding fees built in. So if this is the loan type you choose, you will have the same funding fee regardless of the lender you choose. These are not the same as buy down points or origination fees.
The cost for buy down points and origination fees can vary. However, a general rule of thumb is 1 point buys down the rate 1/8 or .125% and cost 1% of the mortgage balance. To put that in perspective, on a $300,000 mortgage .125% would lower your month payments by $22 and cost $3,000 upfront. So it would take 136 payments to make back up the cost.
If you are payment sensitive or you know you will be in this home for a long time, this might make sense. Builders are also sometimes known offer rate lowering promotions such as this. You could also have this paid for you part of a negotiated seller’s concession. Some lenders might even let you roll this back into mortgage.
It also is worth noting, that sometimes the price difference between rates is minimal. In such case, a buy down point might cost a lot less. Using the same example, if you could buy a 1 point buy down for .5% and get in rolled back into your mortgage it might make a lot more sense. Your payment $22 lower, no upfront cost, and you would make up the difference in 5 ½ years.
A good loan officer will check into these sorts of savings opportunities for you. If you have questions or we can help match you with a loan officer specific to your needs, someone we trust, please contact us.