Buy Down Break Even Calculator

A buy down is a reduction in the price of a financial instrument, such as a mortgage or loan, that occurs when the borrower makes a lump-sum payment. The break-even point is the point at which the total savings from the buy down equal the cost of the buy down.

What is a Buy Down?

A buy down is a temporary reduction in the interest rate or fee on a loan or mortgage. It's often used to make a loan more affordable during the initial period. The buy down is typically paid back at the end of the loan term or when the loan is refinanced.

Buy downs are common in mortgage lending, where they can help homebuyers afford higher-priced homes or reduce their monthly payments. They're also used in other types of loans, such as auto loans and personal loans.

How to Calculate Break Even

Calculating the break-even point for a buy down involves determining when the savings from the lower interest rate or fee outweigh the cost of the buy down. The break-even point is typically expressed in terms of time (months or years) or in terms of the number of payments.

To calculate the break-even point, you need to know:

The cost of the buy down
The original interest rate or fee
The reduced interest rate or fee after the buy down
The loan term

The formula for calculating the break-even point is:

Break Even Point (in months) = (Cost of Buy Down) / (Monthly Savings)

The monthly savings is the difference between the monthly payment with the original rate and the monthly payment with the reduced rate.

Formula

The break-even point for a buy down can be calculated using the following formula:

Break Even Point (in months) = (Cost of Buy Down) / (Monthly Savings)

Where:

Cost of Buy Down = The total amount paid for the buy down
Monthly Savings = (Original Monthly Payment - Reduced Monthly Payment)

This formula assumes that the buy down is paid back at the end of the loan term. If the buy down is paid back earlier, the break-even point will be sooner.

Example Calculation

Let's say you're considering a buy down on a $200,000 mortgage with a 5-year term. The original interest rate is 5%, and the buy down reduces the rate to 4%. The cost of the buy down is $2,000.

First, calculate the monthly payments:

Original monthly payment = PMT(5%, 60, 200000) ≈ $1,264.14
Reduced monthly payment = PMT(4%, 60, 200000) ≈ $1,199.54

Monthly savings = $1,264.14 - $1,199.54 = $64.60

Break-even point = $2,000 / $64.60 ≈ 31 months (2.58 years)

This means that after approximately 2.58 years, the savings from the lower interest rate will equal the cost of the buy down.

FAQ

What is the difference between a buy down and a discount point?: A buy down is a temporary reduction in the interest rate or fee, while a discount point is a permanent reduction in the interest rate. Discount points are typically paid upfront and reduce the interest rate by a fixed amount.
Can I refinance before the buy down is paid back?: Yes, you can refinance before the buy down is paid back. However, you will still be responsible for paying back the buy down at the end of the loan term or when you refinance again.
Is a buy down worth it?: Whether a buy down is worth it depends on your financial situation and goals. If you plan to stay in the home for a long time, the buy down may be a good investment. However, if you plan to sell or refinance soon, the buy down may not be worth the cost.
Can I negotiate the cost of a buy down?: Yes, you can negotiate the cost of a buy down with your lender. Some lenders may be willing to offer a lower cost for the buy down if you have a good credit score or other qualifying factors.