Interest Rates, Loans, and Credit Scores

If you’ve been shopping around for a home, you know that interest rates are constantly changing. Certain types of loans can impact those rates as well as your credit score. VA Loans tend to have slightly lower rates than conventional loans. Buyers with a high credit score are also eligible for more competitive interest rates.

There are a lot of scenarios to consider when buying down your interest rate. With a VA Loan, there is no down payment necessary and generally low closing costs. This option is great for military with a steady paycheck able to make monthly payments but who don’t have a large amount of money upfront. Your loan amount, current interest rates, type of loan, and amount of accessible cash are all key points to consider.

Interest rate buydowns are often used by builders or developers to make their properties more attractive to buyers. They can also be used by sellers by making homes more affordable to potential buyers. It’s important to note that the cost of the buydown may be passed on to the borrower. This means a higher purchase price or other fees.

What Exactly Does “Buying Down” Your Interest Rate Mean?

It is a pretty straightforward concept. If you purchase a house with a loan agreement of 6.5% for a 30 year mortgage the rate signifies the amount of interest paid over the course of the loan. You may buy “points” to temporarily lower this number. One point equals 1% of your home loan. The costs are all dependent upon the loan amount, your lender, and the seller.

Mortgage points can significantly lessen the overall cost over the life of your loan. It can lessen the initial payments to free up cash for emergencies or upgrades. It is especially attractive for homebuyers who did not qualify for low interest rates. However, if you are not going to stay in the home for the long term, it makes less sense to pay for these mortgage points.

Types of Buyback Options

As with home loans, there are a variety of interest buydown options.  It is often a negotiation process between the buyer and lender. Every situation is different but here are a few examples, using $500,000 as the loan amount.

  • 1-0 Buydown: The interest rate is 1% lower for the first year vs. the rest of the loan. For example, if you have a 30 year mortgage at a rate of 6.5%, about $5,000 or 1% of your loan will lower the first year’s rate to 5.5%.
  • 2-1 Buydown: The interest rate is 2% lower for the first year, 1% lower for the second year, and the normal rate for the 3rd and subsequent years.  For example, if you have a 30 year mortgage at a rate of 6.5% for $15,000 (or 3 “points”) you have lowered your interest rate for the first two years of the loan.
  • 3-2-1 Buydown: The interest rate is 3% lower for the first year, 2% lower for the second year, and 1% lower for the 3rd year. After that, the loan will resume with the initial agreed-upon interest rate.

Purchasing mortgage points or including them as concessions paid by the selling at closing is a consideration for many homebuyers. Make sure you work with a knowledgable agent, as some types of loans, including VA Loans, have concession limitations.

Looking for a military-friendly real estate agent in your area to buy or sell a home? Click here to fill out our Military Real Estate Questionnaire and we will help find you an agent that is a great fit or send a us a message.