If you are buying a home, you have probably looked at all kinds of ways to reduce your monthly mortgage costs. These can include putting down a higher down payment or improving your credit to get a lower interest rate. But did you know that you can actually pay to lower your interest rate by doing a buydown?

Buying down points on your mortgage is when you, the buyer, pays a fee to lower the interest rate of your loan. This fee is paid upfront, with each point purchased costing 1% of the overall loan amount. Let’s look at an example.

Sally wants to purchase a home for $500,000 with a down payment of $100,000 and her lender offers her a 30-year fixed loan with a 3.75% interest rate. Sally wants a better interest rate, resulting in greater savings, especially in the first few years that she is paying the mortgage because the interest is paid up front. The lender says that she can purchase one point for 1% of the loan amount, $4,000 for the $400,000 that Sally plans to borrow, and it will reduce her interest rate by 0.25%. Sally is happy that she will get an interest rate of 3.5%.

Most of the time, buyers are interested in buying mortgage points, but sometimes the seller will offer to buy points for the buyer to make the purchase more appealing. This is more common in a buyer’s market when the seller has to make extra concessions to get their home sold. Builders can also use the same strategy to sell new homes.