Two Strategies Make Owning a Home More Affordable: Buydown and Discount Points

Aug 02, 2023By Mortgage Pickers

MP

When it comes to owning a home, affordability is a top concern for many prospective buyers. Fortunately, there are strategies that can help make the dream of homeownership more attainable. Two such strategies are the buydown and discount points. In this article, we will explore how these strategies work and how they can make owning a home more affordable.

The Buydown Strategy

The buydown strategy is a method that allows homebuyers to reduce their monthly mortgage payments during the initial years of homeownership. It involves paying extra funds upfront to "buy down" the interest rate on the mortgage. By doing so, the monthly payments are lower in the early years, making it more affordable for buyers.

How does it work? Let's say you are purchasing a home with a 30-year fixed-rate mortgage. The lender may offer you the option to buy down the interest rate by paying additional points at closing. Each point typically costs 1% of the loan amount. By paying these points, the interest rate on your mortgage can be lowered by a certain percentage.

For example, if the interest rate on your mortgage is 4%, you may have the option to buy it down to 3.75% by paying one point upfront. This reduction in interest rate can lead to significant savings over the life of the loan.

Discount Points

Discount points are another strategy that can help make owning a home more affordable. Unlike the buydown strategy, discount points are paid to reduce the interest rate for the entire term of the loan, rather than just the initial years.

Similar to the buydown strategy, each discount point typically costs 1% of the loan amount. However, the impact of discount points on the interest rate may vary depending on the lender and market conditions.

By paying discount points, you can effectively lower the interest rate on your mortgage, resulting in lower monthly payments throughout the life of the loan. This can save you a significant amount of money over time.

Which Strategy is Right for You?

Both the buydown and discount points strategies can make owning a home more affordable, but which one is right for you? It depends on your specific financial situation and long-term goals.

If you plan to stay in your home for a shorter period, the buydown strategy may be more beneficial as it can provide immediate savings in the early years. On the other hand, if you plan to stay in your home for the long term, paying discount points can result in greater overall savings.

It's important to carefully consider the costs and potential savings associated with each strategy. Consulting with a mortgage professional can help you determine which option aligns best with your financial goals.

Conclusion

Buying a home is a significant financial decision, and finding ways to make it more affordable is crucial. The buydown and discount points strategies offer homeowners the opportunity to reduce their monthly mortgage payments and save money over time. Whether you choose the buydown strategy or discount points, both can help make owning a home more attainable and financially manageable.