We keep hearing this term more often now a days. In this article we shall discuss about some aspects of it and its impacts.
What is rate buy-down?
This is a very controversial tool used mainly by mortgage agents to offer better rates to clients by sacrificing their commission. Some lenders offer this special option to mortgage professionals to reduce mortgage interest rate in order to stay competitive. Not all the lenders offer rate buy down option to brokers and some lenders offer it to status brokers only.
How the buy down is calculated?
This calculation is very lender specific. Some lenders have a cap on it and the formula is not liner. For some, lower the rate, higher is the cost of rate reduction. Lenders offer various options to brokers to calculate the cost. Some offer direct on-line calculators while some provide a rate chart.
Some lenders offer the formula publicly. Like this one. Xceed offers buy-down option to brokers. According the link above – to buy down each basis point (0.01%), a broker has to give up 2.256 BPS and 3.122 BPS on a three and five years fixed rate mortgages respectively. (25 years amortization.)
As an example – if the rate for a five years fixed rate mortgage is offered as 2.99% then to bring it down to 2.89% a broker has to give up 3.122X10 = 31.22BPS. This is applicable for Xceed only. Other lenders have different ways to calculate it.
Differences between lenders;
If you take the above example and go see the ING by-down calculator in their web site then you can punch the numbers yourself and review the results. As we said earlier every lender is different on how this is calculated.
Why interest rate buy down?
This is easy to answer. A broker buys rate down to retain business. Mortgage agents earn their living from commissions and to remain in business they have to offer very competitive rates. Apart from rate buy down there are few more ways to achieve this. If you are not a status broker then buying the rate down is often the easiest option.
Who can do this?
Pretty much every broker has this tool in their arsenal. Not only a broker but a homeowner can also buy rate down for the buyer. If someone selling his home and want to offer a low interest rate to the buyer then some lenders offer that option. BMO does offer that.
To do or not to?
This is entirely a brokers choice. To me it is a useful option to have. If I think that cutting my commission down will bring me future prospect and help a buyer then I shall do it. When it becomes a difficult decision then I do not hesitate to say NO!