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70 Ways for Home Buyers to Save Money When Buying a Home: Tip #24

Aug 17, 2007
A very important tip to save money when buying a house is to never buy down the interest rate.

A buy-down is when you as the borrower, pay extra money to the lender for a cheaper interest rate on your loan than you would normally qualify for. For this privilege the lender will charge you the appropriate buy down fee. It sounds good but you can be sure that the lender will not let you do it unless it was in their best interest. This only makes sense if you are 100% sure you will be in the house for over 10-15 years. Otherwise the math just does not compute. If you want to pay less in interest, pay off the mortgage sooner or make extra payments to principal.

Banks and mortgage companies are always on the look out for providing the most generous looking terms as possible to their buyers while keeping their eyes on the prize.

The first rule of thumb with banks is that they are in the business of making money. Despite low interest and mortgage rates, banks try to offer additional policies disguised as a deal (which it is) with the requirement that a fee be paid. One such example is a buy-down fee.

The buy-down fee is requested when lenders offer a lower interest rate on your loan. It is typically paid during the closing period, although it can also be paid as soon as you apply or when you lock your rate with a commitment agreement. This is also known as collecting points. Because of the newfound discount, lenders are forced to scramble in discounting a percentage of the loan amount and charge a fee that reflects their loss with the buy-down.

Buyers can pay any mortgage rate they want, as long as they pay the fee involved. This means Sam could qualify for a 9% mortgage rate but could get a loan of 4% or 5% as long as there is a buy down fee paid. A buy down loans price depends on how long you want the interest rate lowered, by how much, and how often the interest rate will go up or down. Don't fall for this!

Chances are that by the time you move, you will not have paid that much extra in interest to justify paying this fee. In addition, more money could be saved by taking out an adjustable rate mortgage rather than paying a buy down fee. Many people consider buying down the rate a good deal because they plan on staying in the house for a long time and because they can afford it.

You have to allocate your money. Will the saved money be used for a new purchase, like home improvements on your new property? Chances are, you won't be thinking of this at the time. Buying down the rate is simply too expensive considering your home might not be occupied 3-4 years down the road.

The buy-down fee should not be a savior for anyone. Although rising interest rates is a cause for concern, waiting for them to drop isn't the solution. Remember, you can always apply for mortgage refinance if interest rates go down. Also, sellers may offer to take care of the buy down fee for you in extenuating circumstances. This especially occurs when the market slows down.
About the Author
Mr Kamadia, is a mortgage consultant, and real estate broker in Houston Texas. For the 69 other free articles on saving money when you buy a house visit Abby's Houston Texas Real Estate website.
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