Ask the expert: Buying our first house

We are buying our first house and are concerned about interest rates. Someone mentioned a mortgage buydown to get lower rates. What is this?

A mortgage buydown could make sense for buyers if they have extra cash left over after closing and are buying a house they will live in for a long time.

A mortgage buydown is when someone (the buyer, seller, or builder) pays mortgage points at closing and gets a lower interest rate. If the real estate market favors the buyer, then sellers or builders will sometimes cover mortgage points as an incentive to buy.

A permanent mortgage buydown is when the buyer pays a lower rate for the life of the loan. In a temporary buydown, rates increase after a period of time.

Depending on the scenario, you should intend to stay in the home for at least seven to 10 years. That’s because a buyer typically wouldn’t break even on the extra cash it takes to buy the mortgage points divided by what they would save in a month on their mortgage. If the points cost $16,000 and you save $201 on your mortgage each month, breaking even would take at least 6.6 years. If you move in three years, you lose money. In that case, it would have been better not to buy points.

There are several common variations on the buydown. One is a 3-2-1 buydown. In this case, suppose the buyer gets a mortgage at 6 percent. With the 3-2-1 buydown, the buyer pays an interest rate of 3 percent in the first year, 4 percent in the second year, and 5 percent in the third year. From years 4-30, the buyer pays 6 percent.

The cost of points will vary depending on the lender and the prevailing interest rates. With a 30-year loan on a $400,000 house at a rate of 6 percent, a 3-2-1 buydown would cost about $17,421, which is what the buyer would save on payments over three years.