Many borrowers ask me if they should buy down their interest rate - and many simply think it's a good idea as 4.50% sounds a lot better than 5.0%. With a purchase, their Realtor may even encourage them to take some Seller contributions to buy down the rate. Please be careful with this.

Sometimes it makes sense and sometimes it doesn't. It all depends on the prices for each interest rate, and the break-even points.

For example, would you spend $3,000 to save $3,000 per year? Probably.

However, would you spend $10,000 to save $300 per year?

Probably not.

Make sure your mortgage broker shows you the actual rate sheets which show each interest rate and the corresponding price - and then see what it will cost to save every incremental one-eighth of one percent. Have your broker tell you what your monthly savings will be if you can't do the calculation.

Then, it's a simple calculation to see how many months it takes you to "break-even."

My rule of thumb is if it's less than 24 months, that's a pretty good deal.

In today's lending environment, I see lenders changing their pricing models significantly, and they are not always consistent.

For example, there may be a huge difference in price between two interest rates that are just one-eighth apart.

If that is the case, then you are probably better off taking the cash and just using it to reduce your closing costs, versus using the cash to buy down the rate.

Your mortgage broker or mortgage banker should help you evaluate all your choices. Since this decision has long term effects, take your time and get all your questions answered.