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?
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