Permanent Rate Buydown Calculator
Buydown Analysis
" + "Total Buydown Cost: $" + totalBuydownCost.toFixed(2) + "" + "Current Monthly Payment: $" + currentMonthlyPayment.toFixed(2) + "" + "Buydown Monthly Payment (at " + targetRate.toFixed(3) + "%): $" + buydownMonthlyPayment.toFixed(2) + "" + "Monthly Savings: $" + monthlySavings.toFixed(2) + "" + "Total Interest Paid (Current Rate): $" + totalInterestPaidCurrent.toFixed(2) + "" + "Total Interest Paid (Buydown Rate): $" + totalInterestPaidBuydown.toFixed(2) + "" + "Total Interest Savings: $" + totalInterestSavings.toFixed(2) + "" + "Break-Even Point: Approximately " + breakEvenMonths.toFixed(1) + " months"; }Understanding Permanent Rate Buydowns
A permanent rate buydown is a financial strategy employed in mortgage lending where a borrower pays an upfront fee, often referred to as "points," to permanently lower the interest rate on their loan for its entire duration. Unlike temporary rate buydowns (like a 2-1 or 1-0 buydown) which reduce the interest rate for the initial years of the loan, a permanent buydown secures the reduced rate for the life of the loan.
How it Works
Lenders offer rate buydowns as a way for borrowers to invest in a lower monthly payment. Typically, one "point" costs 1% of the loan amount. Each point purchased can reduce the interest rate by a predetermined amount, often 0.25% or 0.50%, though this can vary by lender and market conditions. The borrower pays the total cost of the points upfront at closing.
The primary benefit is a lower monthly principal and interest payment. This can make a mortgage more affordable, potentially allowing borrowers to qualify for a larger loan amount or simply enjoy more disposable income. Over the life of the loan, the cumulative interest savings can be substantial.
Key Considerations
Upfront Cost: The most significant factor is the initial cost, which is directly tied to the loan amount and the number of points purchased. Borrowers need to assess if they have the liquidity to cover this expense.
Break-Even Point: This is a crucial metric calculated by dividing the total buydown cost by the monthly savings generated. It tells you how many months it will take for the savings on your monthly payments to recoup the initial investment. If you plan to stay in the home and keep the mortgage for longer than the break-even period, the buydown is generally financially advantageous.
Loan Term: The longer the loan term, the greater the potential for long-term savings from a permanent rate buydown, assuming you hold the mortgage for an extended period.
Interest Rate Environment: Buydowns are most attractive when interest rates are relatively high. If rates are low, the cost of buydown points might outweigh the potential savings.
Refinancing: If interest rates fall significantly after you've purchased points, you might consider refinancing. However, the cost of the points is sunk and not recovered in a refinance scenario.
Example Scenario
Consider a borrower taking out a $300,000 loan at 7.0% interest for 30 years (360 months). The current monthly payment (principal and interest) is approximately $1,995.97.
The borrower decides to purchase 2 points to permanently lower their rate. If each point costs $1,000 (2% of the loan amount), the total buydown cost is $2,000. If each point reduces the rate by 0.25%, the new interest rate becomes 6.5% (7.0% – 2 * 0.25%).
With a 6.5% interest rate, the new monthly payment (principal and interest) becomes approximately $1,896.21.
Monthly Savings: $1,995.97 – $1,896.21 = $99.76
Total Buydown Cost: $2,000
Break-Even Point: $2,000 / $99.76 ≈ 20.05 months.
In this example, the borrower would recoup the cost of the buydown in just over 20 months. If they plan to stay in their home for longer than that, the permanent rate reduction will lead to significant savings over the remaining life of their 30-year mortgage.