A mortgage rate buy down is a strategy used to temporarily lower the interest rate on a mortgage loan. It's a financial tool that can make your monthly mortgage payments more affordable, especially in the initial years of your loan, allowing you to save money while you potentially wait for interest rates to decrease or for your income to increase.
How Does a Rate Buy Down Work?
When you "buy down" your interest rate, you are essentially paying an upfront fee to the lender in exchange for a reduced interest rate for a specified period. This fee is often expressed as a percentage of the loan amount. Lenders use these funds to subsidize the interest rate, making it lower for the borrower during the buy down period.
Types of Buy Downs:
2-1 Buy Down: The interest rate is reduced by 2% in the first year and 1% in the second year, reverting to the market rate thereafter.
1-0 Buy Down: The interest rate is reduced by 1% in the first year and then returns to the market rate. (This calculator focuses on a general "Years to Buy Down" scenario, allowing flexibility beyond fixed 2-1 or 1-0 structures.)
The Math Behind the Buy Down
The core of this calculator involves comparing two mortgage scenarios: one with the current market rate and another with the buy down rate for a specified period, followed by the market rate.
The calculation involves these steps:
Calculate the upfront cost of the buy down: Buy Down Cost = Loan Amount * (Buy Down Cost Percentage / 100)
Calculate the monthly payment at the current market rate:
This uses the standard mortgage payment formula (M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1]), where P is the principal loan amount, i is the monthly interest rate (annual rate / 12), and n is the total number of payments (loan term in years * 12).
Calculate the monthly payment at the buy down rate:
This uses the same formula but with the Buy Down Rate.
Calculate total interest paid over the buy down period (using the buy down rate).
Calculate total interest paid over the buy down period (using the market rate).
Determine the monthly savings during the buy down period. Monthly Savings = (Monthly Payment at Market Rate) - (Monthly Payment at Buy Down Rate)
Calculate the total savings over the buy down period. Total Savings = Monthly Savings * (Years to Buy Down * 12)
Calculate the Net Savings: Net Savings = Total Savings - Buy Down Cost
The calculator primarily focuses on the Estimated Monthly Savings during the buy down period, as this is the most immediate benefit. It also provides context on the buy down cost.
When is a Buy Down Beneficial?
When you anticipate your income to rise in the coming years.
When you plan to sell the home or refinance before the buy down period ends.
When current interest rates are high, and you expect them to fall in the future, allowing for refinancing at a lower rate later.
When you want to qualify for a larger loan amount by reducing your initial debt-to-income ratio.
It's crucial to consider the total cost of the buy down versus the total savings during the buy down period. If you plan to stay in the home long-term and the rates don't drop significantly, paying the market rate might be more economical.
function calculateMortgagePayment(principal, annualRate, termYears) {
var monthlyRate = annualRate / 100 / 12;
var numberOfPayments = termYears * 12;
if (monthlyRate === 0) {
return principal / numberOfPayments;
}
var payment = principal * (monthlyRate * Math.pow(1 + monthlyRate, numberOfPayments)) / (Math.pow(1 + monthlyRate, numberOfPayments) – 1);
return payment;
}
function calculateBuyDown() {
var loanAmount = parseFloat(document.getElementById("loanAmount").value);
var currentRate = parseFloat(document.getElementById("currentRate").value);
var buyDownRate = parseFloat(document.getElementById("buyDownRate").value);
var loanTermYears = parseInt(document.getElementById("loanTermYears").value);
var yearsToBuyDown = parseInt(document.getElementById("yearsToBuyDown").value);
var buyDownCostPercentage = parseFloat(document.getElementById("buyDownCostPercentage").value);
var resultValueElement = document.getElementById("result-value");
var resultMessageElement = document.getElementById("result-message");
// Reset previous results
resultValueElement.innerHTML = "–";
resultMessageElement.innerHTML = "";
// Input validation
if (isNaN(loanAmount) || loanAmount <= 0 ||
isNaN(currentRate) || currentRate <= 0 ||
isNaN(buyDownRate) || buyDownRate < 0 ||
isNaN(loanTermYears) || loanTermYears <= 0 ||
isNaN(yearsToBuyDown) || yearsToBuyDown < 0 ||
isNaN(buyDownCostPercentage) || buyDownCostPercentage = currentRate) {
resultMessageElement.style.color = "orange";
resultMessageElement.innerHTML = "The buy down rate should be lower than the current market rate to offer savings.";
// Still calculate to show if there's any marginal difference or cost
}
if (yearsToBuyDown > loanTermYears) {
resultMessageElement.style.color = "red";
resultMessageElement.innerHTML = "Years the rate is buyed down for cannot exceed the total loan term.";
return;
}
// Calculations
var buyDownCost = loanAmount * (buyDownCostPercentage / 100);
var monthlyPaymentMarketRate = calculateMortgagePayment(loanAmount, currentRate, loanTermYears);
var monthlyPaymentBuyDownRate = calculateMortgagePayment(loanAmount, buyDownRate, loanTermYears);
var monthlySavings = monthlyPaymentMarketRate – monthlyPaymentBuyDownRate;
var totalSavingsDuringBuyDown = monthlySavings * (yearsToBuyDown * 12);
var netSavings = totalSavingsDuringBuyDown – buyDownCost;
// Display results
resultValueElement.innerHTML = "$" + monthlySavings.toFixed(2);
var message = "Buy Down Cost: $" + buyDownCost.toFixed(2) + "";
message += "Total Savings during Buy Down Period: $" + totalSavingsDuringBuyDown.toFixed(2) + "";
message += "Net Savings (Savings – Cost): $" + netSavings.toFixed(2) + "";
if (netSavings < 0) {
message += "The buy down cost exceeds the savings during the buy down period.";
} else {
message += "The buy down appears to be financially beneficial during the specified period.";
}
resultMessageElement.innerHTML = message;
}