In today’s blog post, I want to dive into a concept that could significantly impact your finances if you’re considering a home purchase or refinancing in 2024: the Rate Buy Down. So, what exactly is a rate buy down, and is it worth it in the current high-interest-rate environment?
Imagine this scenario: you have the opportunity to pay a lump sum upfront to reduce your mortgage interest rate. That’s essentially a Rate Buy Down. Let’s break down an example I discussed recently with potential buyers. They were looking at a $640,000 loan and were offered the chance to spend 0.00375% of that amount upfront—about $2,400—to lower their interest rate from 7.125% to 7%. This adjustment would decrease their monthly payment from $5,039 to $4,985, translating to savings of $54 per month, or $684 annually.
Now, here’s where it gets interesting: it would take approximately 44 months (that’s three years and eight months) to break even on that initial $2,400 investment. Many might stop there, but there’s more to consider—namely, the savings on interest payments. With the lower rate, you’d save about $2,880 over the same period, which significantly offsets the initial cost.
But should you make this move now, or wait to see if rates drop further? That’s the million-dollar question. If interest rates dip below 7% within the next few years—as some predict might happen post-2024 elections—it might be wiser to hold off. If the interest rates dip 0.75% or more, refinancing could then become a more attractive option, albeit at an additional cost of around $4,000-$7,000.
Predicting interest rates is tricky business, especially in an election year. My cautious estimate is that rates could stabilize around 5.8% by the end of 2026, but there are always variables at play—like the Fed’s policies and the broader economy—that could sway this forecast.
Ultimately, whether you decide to buy down your rate depends on your financial strategy, how long you plan to stay in your home, and your outlook on future interest rates. It’s a decision best made with advice from financial professionals who understand your specific situation.
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Disclaimer: The content in any of Shawn Yu (Shawn Realty) Youtube videos or this website shall not be construed as tax, legal, insurance, construction, engineering, health & safety, electrical, financial advice, or other & may be outdated or inaccurate. Shawn Yu/Shawn Realty is a licensed principal real estate broker/brokerage doing business in Oregon. To contact Shawn Realty for selling, buying investing in Oregon, please email shawn@shawn-realty.com or call 503-515-4499.
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