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Interest Rate Reduction Through Buy Downs

February 21, 2012

A buy down is not a mortgage program, but rather the process of paying fees (buying) to reduce (down) the payments on a loan in order to qualify for a larger loan amount or reduce the payment to a more affordable level. Buy downs are applicable to fixed-rate and adjustable-rate mortgage loans. Buy downs can permanently or temporarily reduce interest payments on a mortgage.

A permanent buy down is also known as a rate discount, which may be described as paying discount points to permanently reduce the rate of the mortgage. For example, a lender may offer a rate of 5.75% with no discount points, or 4.75% with three points. In this example, 4.75% is a “discounted” rate. Permanent buy downs can be illustrated for buyers by reviewing a rate sheet to determine how low the permanent rate will become by paying discount points. “Points” then become closing costs.

The primary reason for utilizing a buy down is to qualify for a larger loan. However, it is important to explain to potential borrowers that one point in closing costs does not reduce their interest rate by one point. For example, on a $100,000 loan at 6%, one point in closing costs ($1,000) would buy the rate down to 5.75%. The exact ratio between buy down points and the resulting lower rate varies, but generally, one point in discount lowers the note rate by 0.25%. Depending on the size of the loan and the out-of-pocket expense, it may or may not make sense for the borrower to buy the rate down.


First, Complete out a loan application on our website
-Go to
-Click on Apply Now at the top
-Scroll to the middle of the page and Click on 3. Full Application
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