How is the interest rate affected by a buy-down of 1.5% of the loan amount?

How is the interest rate affected by a buy-down of 1.5% of the loan amount?

• A. Increases interest rate
• B. Reduces interest rate by 0.25%
• C. Permanently reduces interest rate by 0.167%
• D. Has no effect on the interest rate

Answer: (C)

A buy-down refers to a financing option where a borrower pays additional upfront points to lower the interest rate on their mortgage loan. In this case, if 1.5% of the loan amount is used for the buy-down, it typically results in a permanent reduction in the interest rate over the life of the loan. When calculating the impact of a buy-down, industry standards often indicate that each point (1% of the loan amount) can lower the interest rate by about 0.25%. Therefore, using 1.5% for the buy-down can lead to a reduction of approximately 0.167% in the interest rate. This calculation considers the incremental effect of the amount being used to buy down the rate. This means that if a borrower invests 1.5% of the loan amount into the buy-down, it effectively provides a consistent lower interest rate for the duration of the loan term, thus making the answer correct. Other choices may not accurately reflect the mechanics of how a buy-down works, as they incorrectly suggest that the rate would increase or remain unchanged, which would not align with the expected outcome of applying a buy-down.

A buy-down refers to a financing option where a borrower pays additional upfront points to lower the interest rate on their mortgage loan. In this case, if 1.5% of the loan amount is used for the buy-down, it typically results in a permanent reduction in the interest rate over the life of the loan.

When calculating the impact of a buy-down, industry standards often indicate that each point (1% of the loan amount) can lower the interest rate by about 0.25%. Therefore, using 1.5% for the buy-down can lead to a reduction of approximately 0.167% in the interest rate. This calculation considers the incremental effect of the amount being used to buy down the rate.

This means that if a borrower invests 1.5% of the loan amount into the buy-down, it effectively provides a consistent lower interest rate for the duration of the loan term, thus making the answer correct.

Other choices may not accurately reflect the mechanics of how a buy-down works, as they incorrectly suggest that the rate would increase or remain unchanged, which would not align with the expected outcome of applying a buy-down.