Once you are convinced that you are getting the best rate you can get, ask about a buydown. You need to know how much it will cost, how much less the interest rate will be, and how long the lower rate will last. Then you do a simple calculation comparing the options.
Example: On a $200,000 loan at 6.5%, your first payment would have $1,083.33 going to interest. At a rate of 6.25%, $1,041.67 goes to interest. The difference is roughly $40. If you were to pay one point to lower the rate, it would cost you $2,000. At $40 per month, it would take fifty months to break even, a little over four years.
The break-even date has one more consideration. How much could you earn on the $2,000 if you did not pay it as a point to buy down your loan? If you invested it in a successful stock, you would make much more than you would save on the buydown. However, you could also lose some of it.
Example: If you took the $2,000 and put it in a CD at 3% interest, compounded monthly for four years, it would pay $254.66 in interest. If this is the rate available to you, your break-even date now has to be extended for roughly an additional 6.5 months, figuring your savings at $40 per month.
Do not be afraid to use rough figures and numbers in your head or with pencil and paper. Since each of these situations involves some level of uncertainty, you want to be able to throw out the obviously bad options without wasting a lot of time. If you are not sure of your numbers, ask the lender or broker to figure out the break-even time for you once you are down to those loans that you will seriously consider.
Once you know the break-even date, you simply have to determine what the chances are that you will keep the loan that long. If rates are falling, you do not want to buy down. You are probably going to refinance before the break-even date. If you believe rates are going to rise, it would be beneficial to keep the loan. Now your consideration turns to another decision. Will you sell the home before the break-even date? Things to consider are a possible job transfer, increasing family size, school changes, and so on. There are many reasons why you may move. You can only make an educated guess as to whether you will before the break-even date.