An interest rate buy down is a strategy used in real estate financing to temporarily or permanently lower the interest rate on a mortgage loan. This is typically achieved by paying an upfront fee to the lender, known as "points." One point generally equates to 1% of the loan amount. By purchasing these points, borrowers can reduce their interest rate, leading to lower monthly payments and potentially significant savings over the life of the loan.
Buy downs can be structured in various ways, including:
Permanent Buy Down: The rate is reduced for the entire loan term. This is the most common type and what this calculator focuses on.
Temporary Buy Down: The rate is reduced for the first few years of the loan (e.g., 2-1 or 3-2-1 buy down), after which it reverts to the original or a slightly adjusted rate.
How it Works:
Lenders offer a lower interest rate in exchange for an upfront payment. This payment is calculated based on the number of "points" purchased and the loan amount. For example, if a loan has a 7% interest rate and a buyer wants to reduce it to 6.5%, they might need to purchase a certain number of points. The cost of these points is often expressed as a percentage of the loan amount per point.
The Math Behind the Calculator
This calculator helps you understand the financial implications of a permanent interest rate buy down. Here's the breakdown of the calculations:
Calculate Monthly Payment (P&I) for Current Rate:
The standard mortgage payment formula (M) is used:
M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1]
Where:
n = Total number of payments (Loan term in years * 12)
Calculate Monthly Payment (P&I) for Buy Down Rate:
The same formula is applied using the buy down interest rate.
Calculate Monthly Savings:
(Monthly Payment at Current Rate) – (Monthly Payment at Buy Down Rate)
Calculate Total Savings Over Loan Term:
(Monthly Savings) * (Total number of payments)
Calculate Total Cost of Buy Down:
The cost is typically calculated as a percentage of the loan amount per point.
Total Cost = (Number of points) * (Loan amount) * (Percentage per point / 100)
Where: Number of points = (Current Rate – Buy Down Rate) / (Cost of Buy Down per point percentage)
Calculate Break-Even Point:
This is the point in time when the total savings from the lower monthly payments equal the total cost of the buy down.
Break-Even Point (in months) = (Total Cost of Buy Down) / (Monthly Savings)
The result is then converted to years by dividing by 12.
When to Consider a Buy Down
A buy down might be a smart financial move if:
You plan to stay in the home for a significant period, allowing you to recoup the upfront costs.
Interest rates are currently high, and you anticipate them falling in the future, or you want immediate relief from high payments.
You have the available cash to pay the upfront fees and want to reduce your long-term financial burden.
You want to qualify for a larger loan amount by reducing your debt-to-income ratio with lower monthly payments.
Always consult with a mortgage professional to understand the specific terms and conditions of any buy down program and to determine if it aligns with your financial goals.
function calculateBuyDown() {
var loanAmount = parseFloat(document.getElementById("loanAmount").value);
var currentRate = parseFloat(document.getElementById("currentRate").value);
var buyDownRate = parseFloat(document.getElementById("buyDownRate").value);
var pointsCost = parseFloat(document.getElementById("pointsCost").value);
var loanTermYears = parseInt(document.getElementById("loanTermYears").value);
var monthlySavingsElement = document.getElementById("monthlySavings");
var totalSavingsElement = document.getElementById("totalSavings");
var breakEvenYearsElement = document.getElementById("breakEvenYears");
var totalBuyDownCostElement = document.getElementById("totalBuyDownCost");
// Clear previous results
monthlySavingsElement.textContent = "$0.00";
totalSavingsElement.textContent = "$0.00";
breakEvenYearsElement.textContent = "0";
totalBuyDownCostElement.textContent = "$0.00";
// Input validation
if (isNaN(loanAmount) || isNaN(currentRate) || isNaN(buyDownRate) || isNaN(pointsCost) || isNaN(loanTermYears) ||
loanAmount <= 0 || currentRate <= 0 || buyDownRate <= 0 || pointsCost <= 0 || loanTermYears = currentRate) {
alert("Please enter valid positive numbers for all fields. The buy down rate must be lower than the current rate.");
return;
}
var monthlyInterestCurrent = (currentRate / 100) / 12;
var monthlyInterestBuyDown = (buyDownRate / 100) / 12;
var numberOfPayments = loanTermYears * 12;
// Function to calculate monthly mortgage payment
function calculateMonthlyPayment(principal, monthlyRate, nper) {
if (monthlyRate === 0) {
return principal / nper;
}
var numerator = principal * monthlyRate * Math.pow(1 + monthlyRate, nper);
var denominator = Math.pow(1 + monthlyRate, nper) – 1;
return numerator / denominator;
}
var monthlyPaymentCurrent = calculateMonthlyPayment(loanAmount, monthlyInterestCurrent, numberOfPayments);
var monthlyPaymentBuyDown = calculateMonthlyPayment(loanAmount, monthlyInterestBuyDown, numberOfPayments);
var monthlySavings = monthlyPaymentCurrent – monthlyPaymentBuyDown;
var totalSavings = monthlySavings * numberOfPayments;
// Calculate total cost of buy down
// Determine how many "rate percentage points" are being bought down
var rateDifference = currentRate – buyDownRate;
// Calculate the number of points needed. Assuming cost is per 1% rate reduction.
// If pointsCost is 1.0, it means 1% rate reduction costs 1% of loan amount.
var numberOfPoints = rateDifference / pointsCost; // This assumes pointsCost is the % of loan for 1% rate reduction.
// A more direct way is to calculate cost based on rate difference directly,
// if pointsCost represents the actual cost per 0.125% or 0.25% increment.
// Let's assume pointsCost is the % of loan amount for a 1% rate reduction for simplicity in this calculator's context.
// If the user inputs '1.0' for pointsCost, it means 1% of the loan amount buys down the rate by 1%.
// So, rateDifference of 0.5% would cost (0.5 / 1.0) * 1% of loan.
var costPerPointAsPercentageOfLoan = pointsCost; // e.g., 1.0 means 1% of loan amount
var totalBuyDownCost = (rateDifference / 1.0) * (costPerPointAsPercentageOfLoan / 100) * loanAmount;
var breakEvenMonths = 0;
var breakEvenYears = 0;
if (monthlySavings > 0) {
breakEvenMonths = totalBuyDownCost / monthlySavings;
breakEvenYears = breakEvenMonths / 12;
}
// Display results, formatted to two decimal places for currency
monthlySavingsElement.textContent = "$" + monthlySavings.toFixed(2);
totalSavingsElement.textContent = "$" + totalSavings.toFixed(2);
breakEvenYearsElement.textContent = breakEvenYears.toFixed(1); // Display break-even in years, rounded to 1 decimal
totalBuyDownCostElement.textContent = "$" + totalBuyDownCost.toFixed(2);
}