David Saks: The Permanent Buy-Down : No Shampooing or Conditioner Necessary

David Saks - Real Estate Broker - The Real Estate Mart of Tennessee, Inc. - 4040 North Watkins-Suite #4 - Memphis, Tennessee 38127 - Phone (901) 357-4663

The Permanent Buy-Down : No Shampooing or Conditioner Necessary


It's simple !

You just pay more discount points in order to get a lower interest rate.

Most lenders seem to agree that there is no absolute as to what to consider the costs to be in the final analysis.

The rule of thumb is that 1 point (1 %) is equal to a one-eighth (0.125%) of a percentile drop in the rate.

Checking with the different lenders is a good idea to see what the competition standards are for the moment.

You might find that the costs are much less, depending on the level of competition between the lenders.

For example, a lender might lay this on your borrower:

10% with 1 + 0 (1% origination fee + 0 discount points)

9.875% with 1 + 0.25

9.750% with 1 + 1.00

9.625% with 1 + 1.75

9.500% with 1 + 2.25

The math is a collection of arbitrary numbers.

If you want to break it down you'll disvover that you've got to put up 2.25 % of the loan to get a half point shaved off of the rate, which, in this case, amounts to about .22 percentage points off of the rate for each additional buy-down point your willing to pay.

The cost is a bit more with each increase in the rate reduction in this example. 

The advantages of the permanent buy-down are a set rate and payment for the life of the loan. Not only does the borrower get a cheaper rate, but the additional advantage of having a lower payment.

The disadvantage is the additional cost for the lower rate.

It's important that your buyer has an experienced Realtor and a great lender who understands this process.

What have been your experiences, as lender or agent?

David Saks

Time&Temp Memphis

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Comment balloon 2 commentsDavid Saks • May 25 2008 07:30PM


In almost 30 years of experience, I've never been part of a buy-down.  No one in our areas seems to have the money to buy down after they've already had to pay the buyer's closing costs, and their own closing costs.  I only know of one or two incidents.  Perhaps in other wealthier towns they work.

Posted by Barbara S. Duncan, GRI, e-PRO, Executive Broker, Searcy AR (RE/MAX Advantage) about 12 years ago

There might also be some additional advantages for affluent borrowers, Barbara, because buy-downs can be done on loans other than fixed rate mortgages. Paying more points can give the buyer the additional advantages of a lower intitial rate on an adjustable rate mortgage. I'd like to hear of associative risks or any other disadvantages that might be considered, especially in a volatile market climate. Thanks for posting. Hope you have a great holiday weekend. (originally posted 2008)

Posted by David Saks ((retired)) about 8 years ago

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