Predictably, the permanent buy-down lowers the interest rate for the entire life of the loan. The borrower typically accomplishes this feat by paying discount points, which are interest charges paid in advance.
By paying discount points, the borrower obtains a lower interest rate and lower monthly payments. For those borrower who can afford it, this can actually be an advantageous tactic because of its long-term benefits:
- Reduce interest payments long-term
- Tax-deductible points
- Lower monthly payments
- Qualify for higher loan amount
For example, consider a 30-year fixed-rate $100,000 loan with a current market interest rate of 8.000%. The monthly principal and interest (P & I) payment for this loan would be about $733. However, by paying one discount point (in this case, $1,000), the borrower can lower the interest rate to 7.750% for a new monthly mortgage payment of about $716. That is a savings of $17 per month, or $204 per year, or $6,120 throughout the entire 30-year term of the loan.
Plus, the discount point/fee ($1,000 in this case) is normally tax-deductible.
The permanent buy-down program is usually not recommended for home buyers who plan to stay in the new property for less than five years. Also, if you plan to refinance your loan within the next three years, you should avoid paying any discount points.
As you can see from the above example, the typical mortgage borrower must wait longer than that to recoup the buy-down cost with payment savings.