These days, a lot of home buyers are using mortgage rate buydowns to make the deal work.
They are particularly prevalent on new home purchases, with builders offering massive incentives that push rates down as low as the 3-4% range.
This can make buying a home more palatable at a time when affordability has rarely been worse, thanks in no small part to 7% mortgage rates.
But while a lower mortgage rate means you’ll pay less interest and enjoy a lower payment, why stop there?
There’s a simple way to make your mortgage rate buydown go even further, and shed years off your loan.
Making the Old, Higher Payment After a Refinance (Or in This Case a Rate Buydown)
If you have the means, you can save even more money on mortgage interest beyond what a buydown provides.
Let me provide an example of refinance savings to highlight how the same could be done with a rate buydown.
So if a hypothetical homeowner had a 6% mortgage rate, and refinanced to 4%, they would still make the old mortgage payment as if it were 6%.
And the difference between the lower monthly payment and the old, higher payment would be applied to the principal balance.
For example, let’s assume the homeowner had a $500,000 loan amount and a 6% mortgage rate. Their monthly payment would be $2997.75.
After five years, they decided to refinance their home loan to a rate of 4%, lowering the monthly payment to $2,219.98 (this factors in a lower balance of $465,000 after five years).
For simplicity sake, we’ll call it a $780 difference. Instead of paying the $2,219.98, they could continue paying roughly $3,000 per month.
That would result in the loan being paid off in 18 years and 3 months. And the interest savings would be about $143,756.
Pay Extra on Top of the Buydown to Save Even More
|$600k loan amount at 7.5% rate
||Buydown to 6% mortgage rate
||Buydown w/ savings applied
|Extra Paid Monthly||$0||$600|
|Loan Paid Off Early?||No||Yes, in 21 years|
A similar strategy for a new home buyer with a mortgage rate buydown would be to pay extra as if their mortgage rate were higher.
So imagine a scenario where you get your 30-year fixed rate mortgage bought down from 7.5% to 6%. That’s certainly helpful in terms of monthly payment savings.
But what if you want to pay down the mortgage early, or simply want to save even more on interest?
Well, if you have the means, and don’t have a better place to put your money, you could pretend you never received the buydown.
Instead, operate as if your mortgage rate is 7.5% and pay accordingly. Then watch the years come off your mortgage.
Let’s use a $600,000 loan amount to illustrate this idea. The bought down rate payment would be $3,597.30 per month.
And the pre-bought down rate payment would be $4,195.29. That’s a difference of $597.99 per month.
If we take the difference and apply it to the principal balance monthly, let’s just call it $600 to make it simple, you’d shave a ton of interest off your loan.
In fact, you’d pay about $240,000 less in interest and pay off the mortgage in 21 years instead of 30.
You’d pay 34% less in interest and pay off your home loan 30% faster. If this is a goal, it’s one way to achieve it a lot quicker.
And it would make the effective mortgage rate on your loan a lot lower. It’s like a buydown on top of a buydown.
The loan would operate more like one with a mortgage rate of 4.25% than one priced at 7.5%.
The Mortgage Savings Are Optional (Flexibility Is a Plus)
What’s nice about this strategy is it isn’t mandatory. If you want to save even more money, you can elect to pay extra.
If you don’t want to spend the extra money, simply make the lower required payment each month.
Or skip months if you don’t want to go all-in on paying off the mortgage ahead of schedule.
Ultimately, the choice is yours. But it is a choice, and if you would otherwise qualify at a higher mortgage rate sans buydown, you might have the ability to save more money.
Of course, I always remind folks that paying extra toward the mortgage might not always be the best use of extra money.
Perhaps that money is better applied to a retirement account or some other investment that earns a better return.
Also, note that paying extra will not lower future mortgage payments. Instead, that money is locked up in the property until you sell or refinance.
However, you will have a lower outstanding balance if you pay extra, which might make a refinance a better deal thanks to a lower LTV ratio.
So there’s that possible benefit as well, assuming mortgage rates fall back to earth in the somewhat-near future.
You can use my extra payments mortgage calculator to determine potential savings using a strategy like this.