Should You Buy Down Your Rate on a Commercial Loan?

Saving money when you buy a commercial property is always a bonus, especially if you can find a way to save in the long-term, such as by negotiating a lower interest rate. In fact, securing a commercial mortgage with an interest rate that’s even just slightly lower could save you thousands of dollars over the course of the loan. With that in mind, let's talk about a lesser-known option for a lower interest rate: the loan buy down.

Understanding the commercial loan rate buy down

A loan buy down occurs when a borrower pays a fee at closing in exchange for a lower interest rate. When you pay the buy down, you get points that can be applied to your mortgage to lower the rate. Therefore, it can help to think of a buy down as a prepayment on your interest.

To illustrate, let’s say you bought down a 5-year, $1,000,000 mortgage with a 30-year amortization by $10,000, or one point. If the initial interest rate was 7.25%, the buy down would reduce the rate to 6.875%.

By buying down the rate up front, you would save $257 per month on payments. Over the course of the 5-year term, you would end up reducing payments by $15,432.

The length of time you plan to keep the property is an important point to consider

A buy down is a long-game strategy, so how long you plan to keep the property is an important factor to bear in mind when considering this option. Every situation will be unique, so you'll have to run the numbers in any given scenario to figure out when you'd break even and when you'd start saving money on a buy down.

Keep in mind that the benefits of buying down an interest rate won’t necessarily be seen in the short term. If you do not plan to hold on to a commercial property for a long time, you could end up paying more by buying down the interest rate. This tactic can also be detrimental if your business is currently strapped for cash. Paying a greater amount up front in this case could put your business in a difficult spot.

Do you have the money to pay up front?

Investing in real estate costs money, and it’s possible that you might not have a lump sum available to buy down the mortgage. It’s important to remember that every real estate transaction comes with a number of additional fees, and you have to ensure you still have the money to cover these closing costs, which include:

  • Lawyer fees
  • Appraisals
  • Title searches and insurance
  • Survey
  • Credit report charges

A mortgage buy down can be a great option for some real estate investors who are looking to reduce their interest rate, especially if you plan to keep the property long-term and have the money to pay up front. Contact us today to get the application started for your commercial loan.