Katelyn and Nicholas are first-time home buyers who are very nervous about a potentially large mortgage payment.  They wish to negotiate with the seller to credit them a few points to “buy down” the interest-rate so that they are more comfortable with their monthly payment.  Does that make sense?

“Buying down”  the interest rate is the same as paying “origination fees” or closing costs.  It is all the same – money out of the borrower’s pocket that is paid at the outset of the loan term.  This can be an attractive option for the negotiating buyer who wants to be credited with an amount of cash that will be in excess of the anticipated closing costs.  The value of the subject property will therefore not fall into question, plus the buyer/borrower won’t have to be concerned about profiting from the transaction, as prohibited by RESPA and HUD.  The buyer will also enjoy a much lower interest rate over time and not feel as stretched with a lower mortgage payment. 

An even better solution would be to simply lower the sales price, to the chagrin of both realtors.  This would likely reduce property taxes for the buyer as well.  But sometimes, during the 11th hour of a purchase transaction, buying down the interest rate may be the best course of action.

In situations where there are enough closing costs, then I feel the rate should not be bought down.  Getting the credit for closing costs is like cash in your hand today. 

Finally, in a standard refinance transaction, I rarely advocate paying down the interest rate (ie. Paying points), as I’ve written in previous e-mails, because in doing so, a borrower eliminates the opportunity to refinance should rates go down.  Additionally, the borrower may end up selling before staying in the property long enough to enjoy the low rate and recoup the points.