Buying down a mortgage is an effective way Connecticuters use to get a better interest rate. It means purchasing a discount point that is equivalent to 1% of the loan’s principal amount. You can buy as many points as you can afford to drive the interest lower as much you want.
If truth be told, buying down your home loan in Guilford, Hartford, or Greenwich, is a misnomer. The reduction in interest per point is not a discount since this practice is a means of interest prepayment.
Under certain circumstances, this strategy can save you a ton of money. But if your effort may also prove fruitless in the end.
As what you should do with any mortgage practice, you should calculate the risks of buying down your loan before pulling the trigger on it. Here are the dangers of doing it:
You May Not Get As Many Discounts for the Same Points
The math behind mortgage point computation is universal, but lenders apply interest rate reductions differently. Market forces affect how much interest discount for every point lenders are willing to implement.
It pays to shop around to put your finger on the pulse of the local mortgage industry before agreeing to a particular discount.
You Might Not Keep the Mortgage Long Enough
As a general rule, it is only sensible to buy down your mortgage if you plan to keep it for more than five years. Usually, the break-even point is something in the first 60 months of the term. Paying off your loan earlier erases the benefit of purchasing discount points in the first place.
If you think you will not sell your property or need to refinance your loan within five years, do not buy points just yet. Assess your personal and professional situation to anticipate possible life events that may force you to let go of your bought-down mortgage.
You Might Decrease Your Down Payment
You need to pay for discount points up front, which may affect your capacity to pay a large down payment. As you know, the size of your down payment determines whether you are liable for private mortgage insurance or not. It also defines how much home equity you have right after the property sale.
Apart from the down payment, you need enough cash to cover the closing costs, which are the fees payable to the professionals who process the loan. You also need sufficient liquid assets left in your bank account to convince that lender you can continue your payment despite losing a source of income for some time.
You Might Fail to Get Tax Benefits
Buying mortgage points can come with tax benefits but only if you meet every single requirement set in place by the Internal Revenue Service. Talk to a reliable tax professional first if you use points as deductibles.
All mortgages are not without risks, but buying discount points can cost you more money than you will save. Run the numbers, and put a lot of thought into it before making a big decision.