They Aren't "Giving" You a Lower Rate... You are Buying It!
With rates on the rise, many lenders are advertising lower rates to draw people in. This often comes at a cost to the borrower. Read to learn more!
Is that Advertised Rate Accurate?
With rates on the rise, many lenders are advertising lower rates to draw clients in. Many times, however, there are parameters for a borrower to qualify for this rate. In addition, this rate may come at a cost to the borrower. To determine this, you need to know about the par rate. At the par rate, there is no cost or credit for the rate.
When a borrower applies for a loan, the lender will review items such as credit, debt-to-income ratio, loan amount, and down payment amount to determine whether or not the borrower will qualify for the loan and, if so, at what rate. If the borrower wants a rate lower than the par rate, this comes at a cost. This is often called "buying down the rate." This is a one-time cost incurred by the borrower, and it increases the overall closing costs of the loan.
How Much Does it Cost to Buy Down the Rate?
The cost to buy down the rate varies based on borrower qualifications and loan amount. A reputable lender will be transparent with the cost to buy down the rate from your initial interaction. You can also find this cost on your loan estimate.
It is a red flag if your lender uses a lower rate to draw you in but is not transparent about the costs associated with this rate and its implications on you as a borrower.
Is it Worth it to Buy Down the Rate?
Whether or not it is worth it to buy down the rate varies from one individual to the next, and from one scenario to another. Before buying down the rate, ask yourself:
How long do I plan to be in this house before I move or refinance? (FYI: The average person moves or refinances every 3-5 years.)
How long will it take me to recoup my costs and benefit from the lower rate?
How do these costs impact my overall loan and monthly housing expenses?
Running the numbers to answer these questions will be a starting point to determine whether or not buying down the rate is a good option for you.
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This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.