I’m sure at some point the term "buying points" has come up as you are researching the homebuying process.
Simply put – Buying Points are money you can pay in exchange for a lower interest rate.
Every interest rate has a price attached to it. Par pricing (often seen as 100.00 on a rate sheet) refers to the point in which the interest rate does not cost you more and you are not getting a credit towards your closing costs.
Anything above 100.00 would give you a credit, anything below would require you to pay the additional cost to get that interest rate.
Based on a $400,000 Loan amount…
4.125% - 100.125 price - .125% Credit towards closing costs = $500
4% 100.00 Par Pricing
3.875% - 99.625 price - .375% Cost for interest rate chosen = $1500
It is very important to analyze the break-even point when looking at buying down the rate. The typical lifespan of a mortgage is 5-7 years, so if you are outside of that in your break-even equation (Cost/Monthly Savings = Months to Break-even) it may not be worth the additional costs.
Every situation is different, however, so make sure to discuss all options with your loan officer.