Owning a home might bring you a sense of personal accomplishment and freedom. For many, that freedom comes with the responsibility of a mortgage. You might find at some point that the terms of your existing mortgage no longer suit your needs. Besides selling or renting the home, refinancing can help you accomplish your personal financial goals. Mortgage lenders charge buyup and buydown fees when the interest rate is more or less than the par rate. The par rate is the interest rate that lenders use for no-fee or zero-point loans.
A buyup fee also is known as a negative-point loan. This means that you'll get a rebate or an upfront cost reduction for accepting a higher interest rate. If the par interest rate is 6 percent for a 30-year fixed mortgage, a refinanced loan with an interest rate above 6 percent will have a buyup fee. Essentially, the lender is giving you an incentive in exchange for higher monthly payments and long-term costs. This type of refinance makes sense if you want to reduce or eliminate closing costs and anticipate selling the home within a few years.
The opposite of a negative-point loan is one with positive points, or buydown fees. Although your initial costs are higher with this type of refinance, your long-term costs are lower due to a reduced interest rate. Lenders charge a buydown fee when a mortgage's interest rate is below par. So if the par interest rate is 6 percent and you refinance your mortgage at 5 percent, you'll pay points. You might accept a refinanced loan with a buydown fee so you can reduce the amount of your monthly mortgage payment.
FHA 2/1 Program
FHA loans may qualify for a 2/1 buydown program. Under this program, your FHA mortgage will have a lower interest fee for the first two years. Starting with the third year, your loan's interest rate will return to the par rate. Your buydown fee will equal the amount of interest you will save during the first two years. In exchange for the fee, you'll have lower monthly payments during this time. This could be a good option if you know you'll need to reduce your FHA mortgage payments for a while.
Long-Term Buydown Benefits
While a lower interest rate in exchange for a buydown fee might sound like a good idea, you'll need to consider your long-term plans. It might take almost three years in reduced interest savings to recoup the cost of the fee. If you think there's any possibility that you will need to relocate or change your living situation, it's probably better to refinance at a higher rate or not at all. Should you find that you need to relocate suddenly, there is the option of converting the home into a rental until you recoup the buydown fee.
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