Interest rate options can come with pricing differences. Those differences are called "points". A point is a fee charged by the lender, typically a percentage of the loan amount. Most buyers when inquiring about rates are looking for a rate quote at "par" pricing. This is the lowest interest rate at a given point in time where the lender only charges 1% for the Origination Fee and there are no further "point" costs.
The rate on a real estate loan can be bought up or bought down based on investor or bank pricing over and above the 1% for the Origination Fee. For example; If a buyer does not have quite enough cash to close, the Lender may agree to rebate the 1% Origination cost by offering a slightly higher interest rate. This is acceptable to the Lender since they expect to recoup the rebate over the life of the loan. In the same way, if a buyer wants a lower long term rate, pricing from the lender can accommodate the rate buydown through the charging of discount points. So that paying the lender a premium upfront will result in a discounted note rate for the life of the loan.
Most buyers, especially first time buyers don't buy the rate down for the long term. Sometimes, however, a Seller will offer to credit the buyer up to 6% of the purchase price (FHA/VA limit) towards closing costs. Then it could help by lowering the qualifying house payment. In this market most sellers are not willing to agree to such high closing credits. The exception will be found in new home communities where a new home is move in ready... and a previous buyer "fell out". In these cases some exceptional opportunities may exist.
Whether buying the rate down is something you wish to do, takes some thought and calculation. If you are buying this home and planning to live there until it is paid off, then the investment of some extra up front dollars for a lower life of the loan rate would make sense. Additionally these points are tax deductable in the year paid. But, since many folks really don't plan on being in their home until paid off keeping the extra cash in the bank could be more sensible. This is especially true for first time home buyers who can expect to have additional expenses in the first year of home ownership.
Not all Lenders will offer or allow permanent rate buydowns. For instance CalHFA already offers some of the lowest interest rates for first time home buyers, therefore paying additional points is not an option. Also, the one-half percent down payment program offered to any home buyer who meets county income limits, has a set price with no option to buy the rate down.
As always your questions and comments are welcome.
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