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Buydown Rate Formula:
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Buydown Rate refers to the reduced interest rate achieved by paying discount points upfront in a mortgage or loan arrangement. It represents the effective interest rate after accounting for the points paid over the loan term.
The calculator uses the Buydown Rate formula:
Where:
Explanation: The formula calculates the effective interest rate reduction by spreading the cost of points over the entire loan term.
Details: Calculating the buydown rate helps borrowers understand the true cost-benefit of paying discount points. It allows for better comparison between different mortgage options and helps determine if paying points will result in long-term savings.
Tips: Enter the base interest rate in percentage, the points being paid in percentage, and the loan term in years. All values must be positive numbers with the term greater than zero.
Q1: What are discount points?
A: Discount points are fees paid to the lender at closing in exchange for a reduced interest rate. One point typically costs 1% of the loan amount and lowers the rate by about 0.25%.
Q2: When does it make sense to buy down the rate?
A: Buying down the rate makes sense when you plan to stay in the home for longer than the break-even period (when monthly savings exceed the upfront cost of points).
Q3: How accurate is this calculation?
A: This provides a simplified calculation. Actual buydown arrangements may vary based on lender policies and specific loan terms.
Q4: Can points be deducted on taxes?
A: In many cases, mortgage points are tax-deductible in the year they are paid, but consult with a tax professional for specific advice.
Q5: Are there different types of buydowns?
A: Yes, there are temporary buydowns (where the rate increases over time) and permanent buydowns (where the reduced rate lasts for the entire loan term).