Rate Buy Down Calculator
Use this calculator to determine the financial impact of paying an upfront fee (known as a "buy down") to reduce the annual percentage on your mortgage. It helps you understand your monthly savings, the break-even point, and total savings over the loan's duration.
Understanding a Rate Buy Down
A rate buy down is a strategy used in mortgage financing where a borrower pays an upfront fee, often referred to as "points," to secure a lower annual percentage on their loan. Each "point" typically costs 1% of the loan amount and can reduce the annual percentage by a certain fraction (e.g., 0.25%). This upfront payment reduces your monthly mortgage payments over the life of the loan.
How Does It Work?
When you opt for a rate buy down, you're essentially pre-paying some of the financing charges. In return, the lender offers you a reduced annual percentage. This can be particularly attractive in environments where annual percentages are high, or if you plan to stay in your home for a long time, allowing you to "break even" on the upfront cost and then enjoy net savings.
Key Considerations
- Upfront Cost: The primary drawback is the immediate out-of-pocket expense. You need to have the funds available at closing.
- Monthly Savings: The benefit is a lower monthly payment, which can significantly improve your cash flow.
- Break-Even Point: This is a crucial metric. It tells you how long it will take for your monthly savings to equal the upfront buy down cost. If you sell or refinance before this point, you might not fully recoup your investment.
- Loan Term: The longer you plan to keep the loan, the more beneficial a buy down can be, as you'll have more time to accumulate savings beyond the break-even point.
Example Scenario
Imagine you're taking out a $300,000 mortgage for 30 years. The standard annual percentage is 7.0%. Your lender offers you the option to pay $3,000 upfront to reduce your annual percentage to 6.5%.
- Without Buy Down: Your monthly payment would be approximately $1,995.91.
- With Buy Down: Your monthly payment would be approximately $1,900.67.
- Monthly Savings: You save about $95.24 per month.
- Break-Even Point: It would take approximately 31.5 months ($3,000 / $95.24) to recoup your upfront cost.
- Total Savings (if held for 30 years): If you keep the loan for the full term, your total savings would be substantial, far exceeding the initial $3,000.
This calculator helps you quickly assess these figures for your specific situation, allowing you to make an informed decision about whether a rate buy down is right for you.
Calculation Results:
"; resultHtml += "Standard Monthly Payment: $" + originalMonthlyPayment.toFixed(2) + "
";
resultHtml += "Lowered Monthly Payment: $" + reducedMonthlyPayment.toFixed(2) + "
";
resultHtml += "Monthly Savings from Buy Down: $" + monthlySavings.toFixed(2) + "
";
if (monthlySavings <= 0) {
resultHtml += "A buy down is not beneficial with these percentages. The lowered annual percentage is not less than the standard, or the savings are negligible.
";
} else {
resultHtml += "Break-Even Point: " + breakEvenMonths.toFixed(1) + " months
";
resultHtml += "Total Savings Over Loan Term: $" + totalSavingsOverTerm.toFixed(2) + "
";
if (breakEvenMonths > numberOfPayments) {
resultHtml += "Note: Your break-even point (" + breakEvenMonths.toFixed(1) + " months) is longer than your loan term (" + numberOfPayments + " months). You may not fully recoup your buy down cost if you hold the loan for the full term.
";
} else if (totalSavingsOverTerm < 0) {
resultHtml += "Note: Even though you save monthly, your total savings over the loan term are negative, meaning the buy down cost outweighs the total monthly savings. This can happen if the break-even point is very close to the end of the loan term.
";
}
}
document.getElementById("result").innerHTML = resultHtml;
}