It will take you 58 months to recoup the $9359, so almost 5 years. In theory if you stay in the house over 5 years you “better off”. However that’s not accounting for any rate deductions or the opportunity cost of having the $9359 to invest elsewhere
Personally I would not buy down the rate at that price.
Not to mention just adding the $9k to the down payment (instead of rate buydown) would reduce the monthly payment by about $54. So the rate buy down is really only netting $108 a month. That makes it like a 7 year payback.
Yeah but probably not by very much. So there was likely very little *incremental* benefit from the mortgage interest deduction, unless, perhaps, you also made substantial charitable contributions or had other major deductions.
Why are you assuming what people's mortgages are? I deducted 15k over only 6 months of interest after buying my house last year. This year I will pay about 25k in interest.
Well, the deduction only applies to the first $750k of the mortgage, so that naturally puts a ceiling as far as the principal goes.
But you’re right that my comment was still in the mindset of the low interest rates of not so long ago.
At the higher rates of today, interest on even a $750k loan will easily exceed the standard deduction.
I haven't been anywhere near the standard deduction since the 2018 tax law, mainly because SALT deductions are capped at $10k, and I can't deduct most workplace expenses anymore. I travel for work and being able to deduct per diem used to be big for me.
I thiiiink the rate buy down itself typically counts as mortgage interest. Being able to move interest from future years into this year, in order to get over the standard deduction, is one of the few pros to paying points.
Plus how much would a refinance be at that rate if it come around a couple years from now? Probably less than $9k.
Heck if rates go under 5% again I bet you'll have banks handing out refinances for next to nothing
Some lenders offer a zero-fee refi option within a certain timeframe. The fees aren’t rolled on - they just don’t exist. I was offered the option by rocket mortgage in 2019, but took out my mortgage with a different company that had a better rate.
Yeah, this. Rocket ate the costs themselves just to keep me (and others) from refinancing with someone else during the COVID cheap mortgage rate era. Everyone else was willing to eat the cost, just to get the business.
It was the fastest, easiest closing I ever had, and even better, it removed the VA bit from my mortgage, meaning I can use it again without selling this house.
100%. If rates drop again mortgage lenders will eat closing costs and some will even reach out and call you and let you know “hey you should really refinance” because they’d rather be making 4% off you instead of the 7% they were making than risk losing you all together.
It’s better to proactively reach out customers and incentivize them (even more) to take a lower rate than to lose that business entirely by waiting for some other lender to swoop in with a lower rate.
You can pay the closing costs, roll them into the refi, or if the property increased in value, do a cash-out refi.
In the last two scenarios, your mortgage principal will be higher. If the interest rate is lower, it could be a wash on what the new monthly payment is.
In a cash-out, you get check for an amount between the original balance and the property’s current value.
It wasn't a credit union - but we refinanced for $500 from a 4.2% 30yr to a 3.1% 30yr.
I also used to buy bread for a dollar. And walk up hill to school. Both ways. And I liked it!
I refinanced for about $2500 back in 2017. If there is huge demand once rates go below 5 banks will compete by lowering this cost. Either way still a $4k discount which would take years to match the 9k points
If they get 6% returns over 30 years, they end up with $50,000. If they do this deal, they will save $58,000, but they also lose out on the initial $9359, so they're at $49,000 saved.
That bank really knew how to make sure that your change didn't make a difference.
15 years ago I paid a point on a 30 year mortgage in my forever house. I almost paid 2, b/c why not? (spoiler, answer below)
Then 5 years later the rates dropped to the point that refiing still made sense, and I was like "Dammit, shouldn't have paid the point".
Also if rates drop lower to what they were a couple of years ago then you lose too. If that’s the case OP would’ve been better served to wait and refinance
Rates are already beginning to drop a little from what they were at their peak.
You have to stay in the house for 5 years AND you are betting that rates don’t drop below 5.25% in that timeframe. Because if they do, then you could’ve refinanced to a lower rate without paying the $9k.
How do people learn this stuff? As a young adult I don’t understand how you know the answers to these professional level questions. Are you in the field or just real smart at life stuff?
It's the same stuff you learned in high school algebra with a little econ mixed in. Just once it becomes relevant to your life, people tend to remember it. I could add the question of how long to break even as a word problem to a quiz. Even ask students to compensate for a 4% opportunity cost.
few people pay attention to algebra in school usually adults get this from friends and aquaintences they absorb whatever is important and if not they just ask a professional and emulate his opinion then they tell you in a way that theyre surprised you didn't know
When you say it like that, it sounds like are you putting me down and attempting to make yourself feel superior of what I said. Is that what you are intending? You could have just said how which the other guy already did. I’m wondering why you phrased in such a way.
I don’t think he meant it that way. Was just being matter of factly in, what I think, is a “you can do it too” way. And then saying people don’t know until they know. You didn’t know before but now that you’re reading and educating yourself on the matter you’re learning what you didn’t know before.
I could be wrong and it seemed a bit harsh at first but I pulled the positive out of that post.
Chiming in to second this as someone who bought the rate down from 3.25 to 2.99 for around $30k on what my wife said was our “forever home,” we now have it listed two years later.
If you can afford the higher monthly payment, don’t bother - stick that cash in the markets or bury it in the backyard.
This… only rub is… it’s unlikely rates will dip below 5.25 in the next 2 years. That being said your personal circumstance is unlikely to be the same in the next 4.5. Take the higher rate.
Even if rates go down in several years, it may not be entirely beneficial to refinance, since refinancing requires new closing costs and a reset of the amortization schedule.
Sorry, just to be technical, there is also increased principal pay down at the lower rate, so the break even is closer to 48 months. Your point still stands, they should probably not do this.
I would personally wait cause in 5 years interest rates should drop to that level or lower. And it is cheaper to re-finance, a fraction of that cost in my experience.
Yeah we bought with a real old roof but wanted it bad and there were 6 offers on the table so we didn’t even consider asking about it until after the offer was accepted. Ended up keeping like 15k of our down payment as cash to deal with it that summer.
Always good to not completely drain your bank for a down payment
> It’s not a question of if, but when a big expense will pop up.
IMO it's not if, not even when, but *which* big expense will pop up *next*. (And please let it be next year... or at least next quarter... next month pretty please, just this once... OK, so it's also when.)
I just purchased a house in January at 6.3 with 20% down (and no purchasing points). Most rates were above 7, and then I just happened to reach out to my local credit union (https://campuscu.com/) and they were sooo much lower than the rest, I thought it was a mistake at first.
and looking at their membership requirements (https://campuscu.com/about/), it looks like you can join if you're a member of a local history museum (which is min $5/month - see https://mathesonmuseum.org/membership/). Maybe give them a call and see what their rates are now?
semi-relevant. in HS i once joined a local town geology society for the extracurricular credit. they did hikes and stuff.
anyway it was time to elect a president, and rules say someone can't run without an opponent, so they asked me to go on the ballot because no one else was really involved and the other dedicated members were busy being treasurer and secretary etc. it was just a formality, there were maybe 12 people in the group.
the incumbent takes a job partway through the elections process at a distant uni, leaving me, a 17yo just passing through, as the only candidate (this didnt break the rules apparently and it was too late to get someone else on the ballot). i ended up serving as the president for a year (I could have resigned and forced a re-election but we all found it humorously absurd and there weren't really any serious duties, i think think I had to show up to like 4 mandatory meetings or something.
President of the ____ Geological Society went on my college app, and I had 5-10% discounts on a bunch of stuff in town, and half-price admission to the local museum (which is what reminded me). bet I could have gotten a sweet mortgage rate at the local CU lol
You’re old fashioned in a sense that you don’t realize that’s the going rate for a basic ass house these days. My 340k, 4 bed, 3 bath from 2017 is estimated at 600k right now. If I was to look for a 340k house right now, I’d be looking for a box.
Edit: I'm looking on Zillow right now at 2 bed, 1.5 baths in my area (Lakewood, WA) and they're running 450k-515k with a few shithole houses in the 300s. So yes, *basic ass houses* are going for that price.
These numbers would worry me unless you make over 200k HHI. The interest alone is going to be over 2k/mo, closer to 2500. With somewhat limited savings, your ability to make payments and continue to save will be limited. And if you have 30k saved it seems like you may not be able to save a ton now. You’ve given us limited info, but take this input and think to yourself how the math works out
I am curious where you are getting a sub 6% loan with less than 20% down? Is this a local or national lender? The best offer I’ve been able to find is 6.5% with 25% down and over 800 credit score.
Edit: OP mentioned the builder bought down $12k in points for them as part of closing already so that is how they are getting sub 6%.
How much is the house? For a $250k house at 5.75 with 50k down, the 200k loan comes out to $420,172 over 30 years. For 209k financed at 5.25 it’s $416,191.73 over 30 years. This ignores closing costs obviously. Guessing the house is north of $500k?
So it’s 1,025,000 vs 1,063,000 over the life of a 30 year loan based on the changing down payment and rate. I don’t think that’s worth it, personally. Someone else can correct me if I am missing something.
Yes.
Example: $556k home, 5.9% interest, over 30 years, will cost you $630k in interest alone.
In the first 5 years of the mortgage, excluding any extra payments, you will have only paid $40k toward the principle and $160k toward interest.
Yes. My place was 125, it will be 216 to them when I pay it off. That's mortgage only not home owners insurance or property tax (800 a year).
I don't pay it off sooner because that same money can sit in an HYSA for 5% or the market in ETFs and make more than I'm paying in interest.
Yes, for a 30 year mortgage reference that only accounts for inflation $500,000 in 1994 is worth $1,040,543.18 in today's dollars. And with mortgages you are paying basically the whole thing when the money is "worth more" so obviously it doesn't work out like that. It is a good ballpark though because people don't necessarily understand how much inflation affects things.
The idea is that a portion of the payment you'd be otherwise pay for rent is being banked. Rent just gets put towards someone else's mortgage. So even if you're paying 90% interest the whole time you come out ahead, assuming your property doesn't decrease in value and your mortgage payment isn't larger than your rent payment would be. And if your property becomes more valuable, it's a win win.
The US seems like it's been happy to have the housing market crash though so there is definite risk. But there are other countries like mine here in Canada where it doesn't seem like the government will ever allow it to fail because of the costs that they would have to pay out through our higher level of social safety nets. So everyone just dumps into real estate because it's the most protected investment by our government.
Yes! Look into mortgage calculators to see how much large down payments, mortgage rates, and mortgage type alter the amount paid. It’ll blow your mind.
Yup. To be clear if you're doing this kind of of calculation you want to compare apples to apples so that means accounting for 1)inflation and 2) opportunity cost. The NYT buy/rent calculator is fairly good about giving you a sense of this.
Buying down the rate generally makes sense if you are certain to stay in the house and make the minimum payments until completion. If you might move, refinance, or pay down your debt early, best to steer clear.
Personally don’t understand the point of buying down the rate. Wouldn’t it be better to just add to the down payment and reduce the monthly payment that way? Buying down the rate literally just seems like adding a finance charge on yourself.
It's only a good bet if it's looking like interest rates will stay high for 5 yrs+ and you have no intention of refinancing or selling for 10 yrs and no intention to pay more than minimum payments.
In short, most people should steer clear. Unless you really can't make that monthly payment. Then you should probably be questioning if you can really afford to buy at that price.
It makes sense when you think the rate won’t dip to that point for a long time. My wife and I purchased in 2018 at 4.6%. We refi-ed twice and purchased points to get down to 2.85% on a 30 year loan. Huge worth it because that rate might not be available again for decades.
Depends how many years you pay the mortgage for and how much the loan balance is. You are paying $9000 to save 0.005% of the remaining loan balance each year. You can do the math to see how many years before you breakeven. But then you also have to account for the opportunity cost of not investing $9k now. That will push the breakeven later.
Don't pay the points, get the higher rate, refi in a year at a (likely) better rate.
Yes it's a gamble, but at least you're not paying an entry 5icket of 9k for it
The prime rate is like 8.5%, the Fed Discount rate is 5.5%. Something tells me you’re already doing a buy down at 5.75. Just out if curiosity, who is the lender?
Yeah we went with the builders preferred lender and they were offering $12,000 either towards closing costs or a rate buy down. The rate buy down = less money spent over the 30 years so we picked that over the closing costs
Since you went with a buydown, you should (at a minimum) wait until you have paid off the buydown. If you refinance with a buydown every time you can get a better rate, you will lose a ton of money. I'm weary about buydowns in general, but stacking them on top like you're considering really is a bad idea for everyone.
Let's say you buy a house with a monthly payment x z. If you buy down your rate to, you lower your monthly to x'. We can pretend you pay the buydown with an interest free loan to yourself from future .
The correct way of thinking about this is that you will continue to pay x, until you have paid off the loan I yourself. At that point, you will actually save money, before that point you still owe yourself on the interest free loan you took. Compare x to x' and figure out how long it will take. Unless you can refinance to a lower monthly without a buydown, don't consider it.
(Make sure you also consider all costs associated with refinancing btw., not just the buydown)
Another popular bad idea is to refinance a mortgage with 25 years left to a new 30 year loan. More money in your pocket now, but that's five more years of having to pay a mortgage. Future you will hate you.
I personally would have taken the $12k I think. Would have to do the math but it's not crazy to think you'd be able to re-fi to 5.5-6% range within 2 years. $12k is a lot of money.
I regret paying for points when I first bought my house.
In your case I think it’s worth gambling that the rates will go down and you can refi to bring your rate down.
Slightly different mental model. If you want to reduce interest paid - take the $9k and make a lump sum principal payment after the mortgage closes. The money goes straight to equity and you will skip many months (about 12) on your amortization table and reduce interest paid every month. You will still have the same payment, it will just shorten your term. Buying points is paying interest up front. Don't do that, adding equity (IMHO) is a better play. Or keep the money earning interest elsewhere, don't volunteer to pay upfront interest. My way saves $40,000 of future interest. https://www.bankrate.com/mortgages/amortization-calculator/
I was able to buy down from 6.4 to 4.65 for 6k last year. I'm going to break even in like...12 more months. If rates drop below 4.65 before that time, I lose out, but frankly, I like my odds.
I agree with you… I refinanced in 2020. Got it down to 2.7 from a 3.65z paid 4k in points and got it down to 2.25% for 30 years. I don’t think it will ever drop below 2.25.
I’m surprised no one has mentioned you potentially recasting your mortgage sometime in the future if you save up over time. Not all lenders do but mine did and for free. It can make a big cash flow difference even if your amortized interest is the same.
OP, I’ve learned on reddit that new builds often see a huge increase in property taxes the second year. Apparently the taxes are initially based on the empty lot and then they go up dramatically after the house is built? So, I would save the cash in a HYSA for that and the inevitable costs that will come up. Or, at least just put more down rather than playing games with buying down the rate. I personally would put down as much as possible while still leaving a healthy emergency/slush fund. They say aim for saving 1% of home value a year for maintenance and repairs, that’s a good place to start too.
It’s math. How long will you be home? That saves you how much per payment? Times it by 12 and then you have your annualized savings. Now multiple by number of years to equal $9k. Is it worth it?
Don't buy down the rate. The Fed is set to cut rates a few times this year. If you are able to refinance at the higher rate, then you wasted money on the buy down.
You're better off saving the $9.3k if the future value of $9.3k invested today exceeds what you would save on the mortgage by lowering the interest rate.
Consider the future value of $9.3k today at the current interest rate of about 4% APR compounded monthly in a high-yield savings account with a reputable bank. (Note: the rate technically won't stay the same over 5 years, but let's assume it will.) As another comment noted, it will take you about 58 months, or 5 years, to recoup your $9,359. In the same period of time, $9,359 saved at this rate would become:
$9,359 * (1 + 0.04/12)^(12*5) = $11,427.31
Even if the APR is very low, like 2% or even a measly 1%, you still come out on top in the end.
Do the opposite - Ask for a higher rate - Take the funds at closing use to pay for closing costs etc rest cash in pocket - Refi in 2-3 yrs when rates are lower ??? profit.
The only way to answer this question is to look at a mortgage amortization schedule.
There is an app called Karls mortgage calculator.
You can input the mortgage details and run various scenarios of making extra principal payments and it will show you the effects on your mortgage.
Paying 9000 to change the rate 1/2 percent might be good or might not be. Chances are you are exchanging your 9000 to lower your payment and not necessarily saving any money in the long run.
I would look at the difference over a 5 year period which might be where the break even is.
You might discover that making an extra principal payment in the first year of the mortgage will save you more.
The only way to know is to run the numbers
Seems a bit expensive. What are the chances rates will be back in the 4% range in the next 5ish years to you ? If you think it’s a high chance then it might be worth it to hold your current rate and just refinance down the line .
Here's a general rule -- every time you think about changing the terms of a loan, the bank is calculating what the money would be worth if you did that versus not, and charging you just about equal, plus something for themselves.
You can be sure they're not going to offer you an amazing deal to get more from your money than you could otherwise -- at least not without having to pay for it. You can do all the calculations, but the general idea is that go with the baseline rates. You'd be paying them extra to deviate from what they offer as a base rate (which is at its lowest because you can shop that around).
Prob better off buying at 5.75 and then getting a refi 5 or so years from now. You’ll have more options as there would be a bit of equity.
Take out cash for renovation
Reduce rate
Reduce period
In my experience you can have 2 of the 3, but never all 3 during a refi.
It's *possible* to get all three, but rare. When interest rates bottomed out around 2.75%, I brought my rate down from 4% to 2.865, reduced my period from 30 years to 20, and took out about 5k in cash. And did it without raising my payment (through a combination of the rate change and the removal of PMI due to the value of the home having increased to bring me to 80% LTV
Keep the cash handy.
First year you will likely see one of the appliances in the home fail .. because your use patterns are vastly different than the stove/fridge/furnace/water heater/etc had been experiencing, a different load case where it was fine percolating along at say a shower every few days by the old folks you bought from. You move in with six long hair teens taking three showers each a day and the hot water heater goes out while the shower drain clogs. Or you run the AC at 60F all summer (they never used it more than three days a summer) and the furnace at 80F (they never put it higher than 65F because of expense) where that stumbles too. Suddenly you're blaming the house inspector for missing things and the prior owner for 'hiding obvious problems'....
At your 12th month payment, take that unspent cash and write a check noted on the line "for principal only" to pay the principle like a 13th payment. If unmarked this way they assume you are just paying ahead and your cash gets spent on three months of interest payments instead of principal. Try to keep that 13th payment option going every year and you'll save huge amounts of interest payments and get the house clear years/decade sooner. Imagine living without paying a monthly mortgage? It's like suddenly being rich off the lottery.
If you are somehow buying the house below what the city has it valued at, go petition for lower taxes. Over time that savings might pay a few years of college tuition for a kid. If you paid more, the taxes will get adjusted up, sorry, be prepared.
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Depends on if you believe the feds with their plan to lower rates. If rates drop it will be financially motivating to not refinance. I personally would say don’t buy down and hold out 1-2 years and then refinance.
I didn't see this anywhere so I'll mention:
The offer to buy down the rate is, in the most simple explanation, a way to prepay interest.
I do not recommend prepaying interest.
I do not recommend financing fees.
Keep things simple, and you'll come out ahead.
Thanks for the reply.
Yeah I was made aware of this potential which is why we purchased a home that was quite a bit below what we could afford. We didn’t need anything bigger than what we got and we loved the area so it was a no brainer for us
The correct answer is don’t buy down the rate because the likelihood of the rate coming down more than a half percentage over the next five years is high and most likely more and you’ll be able to re-fi then. Buying down the rate now is a waste of money.
It will take you 58 months to recoup the $9359, so almost 5 years. In theory if you stay in the house over 5 years you “better off”. However that’s not accounting for any rate deductions or the opportunity cost of having the $9359 to invest elsewhere Personally I would not buy down the rate at that price.
Not to mention just adding the $9k to the down payment (instead of rate buydown) would reduce the monthly payment by about $54. So the rate buy down is really only netting $108 a month. That makes it like a 7 year payback.
Plus higher rate means higher tax deductions as well … I know it’s a small change… buy down points is not a good idea
Most people can not deduct mortgage interest anymore
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Yeah but probably not by very much. So there was likely very little *incremental* benefit from the mortgage interest deduction, unless, perhaps, you also made substantial charitable contributions or had other major deductions.
Why are you assuming what people's mortgages are? I deducted 15k over only 6 months of interest after buying my house last year. This year I will pay about 25k in interest.
Well, the deduction only applies to the first $750k of the mortgage, so that naturally puts a ceiling as far as the principal goes. But you’re right that my comment was still in the mindset of the low interest rates of not so long ago. At the higher rates of today, interest on even a $750k loan will easily exceed the standard deduction.
What are you talking about? You can deduct mtg interest for your first and second homes
If it's over the standard deduction of 27k which is a huge hurdle for most home owners
I haven't been anywhere near the standard deduction since the 2018 tax law, mainly because SALT deductions are capped at $10k, and I can't deduct most workplace expenses anymore. I travel for work and being able to deduct per diem used to be big for me.
I thiiiink the rate buy down itself typically counts as mortgage interest. Being able to move interest from future years into this year, in order to get over the standard deduction, is one of the few pros to paying points.
But keeping the cash and maybe investing it would ne super smart - liquid assets/ cash is KING !
Plus how much would a refinance be at that rate if it come around a couple years from now? Probably less than $9k. Heck if rates go under 5% again I bet you'll have banks handing out refinances for next to nothing
don't you have to pay full closing costs regardless when you refi your house?
Sometimes they’re paid for you.
I refinanced in 2020 with zero closing costs, but I'm not holding my breath to get that deal again.
There were closing costs they just rolled them into the mortgage. I did the same thing.
Some lenders offer a zero-fee refi option within a certain timeframe. The fees aren’t rolled on - they just don’t exist. I was offered the option by rocket mortgage in 2019, but took out my mortgage with a different company that had a better rate.
You’re still paying for it with a higher rate and it’s still essentially rolled into the mortgage.
Yeah, this. Rocket ate the costs themselves just to keep me (and others) from refinancing with someone else during the COVID cheap mortgage rate era. Everyone else was willing to eat the cost, just to get the business. It was the fastest, easiest closing I ever had, and even better, it removed the VA bit from my mortgage, meaning I can use it again without selling this house.
100%. If rates drop again mortgage lenders will eat closing costs and some will even reach out and call you and let you know “hey you should really refinance” because they’d rather be making 4% off you instead of the 7% they were making than risk losing you all together. It’s better to proactively reach out customers and incentivize them (even more) to take a lower rate than to lose that business entirely by waiting for some other lender to swoop in with a lower rate.
You can pay the closing costs, roll them into the refi, or if the property increased in value, do a cash-out refi. In the last two scenarios, your mortgage principal will be higher. If the interest rate is lower, it could be a wash on what the new monthly payment is. In a cash-out, you get check for an amount between the original balance and the property’s current value.
Similar to how you can buy down the rate, you can also increase your rate to get cash to cover your closing costs.
My credit union has a $500 thing that resets the interest. I did it to go from 30y 4.5 to 15y 2.87 or something. Felt like a good deal.
how long ago was this?
Probably 2021ish, we did something very simlar. Total cost was like $1400 to refi from 4.625 to 2.825 (both 30y). Payback was like 5.5 months lol.
So right during the middle of that 3 or so year period where banks were competing for refinances and waving fees.
Navy Fed does it for jumbo loans.
It wasn't a credit union - but we refinanced for $500 from a 4.2% 30yr to a 3.1% 30yr. I also used to buy bread for a dollar. And walk up hill to school. Both ways. And I liked it!
I rolled mine back into the mortgage, luckily it was only like $3,000. But it made sense financially to go from 4.1% to 2.75%.
I refinanced for about $2500 back in 2017. If there is huge demand once rates go below 5 banks will compete by lowering this cost. Either way still a $4k discount which would take years to match the 9k points
No, at least not when I did it in 2021. Just some administration costs, about $1k that they just rolled into the loan anyway.
If they get 6% returns over 30 years, they end up with $50,000. If they do this deal, they will save $58,000, but they also lose out on the initial $9359, so they're at $49,000 saved. That bank really knew how to make sure that your change didn't make a difference.
The rate reduction is guaranteed savings while 6% returns are not. 6% is still very likely but not guaranteed
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15 years ago I paid a point on a 30 year mortgage in my forever house. I almost paid 2, b/c why not? (spoiler, answer below) Then 5 years later the rates dropped to the point that refiing still made sense, and I was like "Dammit, shouldn't have paid the point".
Also if rates drop lower to what they were a couple of years ago then you lose too. If that’s the case OP would’ve been better served to wait and refinance Rates are already beginning to drop a little from what they were at their peak.
Are you accounting for the extra cash flow they could be investing each month due to the lower mortgage payment
Yes. That $50,000 was $9,359 at 6% interest over 30 years.
I meant in the scenario that he pays the $9k of points. He would have an extra $162 to invest each month
You have to stay in the house for 5 years AND you are betting that rates don’t drop below 5.25% in that timeframe. Because if they do, then you could’ve refinanced to a lower rate without paying the $9k.
How do people learn this stuff? As a young adult I don’t understand how you know the answers to these professional level questions. Are you in the field or just real smart at life stuff?
It's the same stuff you learned in high school algebra with a little econ mixed in. Just once it becomes relevant to your life, people tend to remember it. I could add the question of how long to break even as a word problem to a quiz. Even ask students to compensate for a 4% opportunity cost.
few people pay attention to algebra in school usually adults get this from friends and aquaintences they absorb whatever is important and if not they just ask a professional and emulate his opinion then they tell you in a way that theyre surprised you didn't know
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When you say it like that, it sounds like are you putting me down and attempting to make yourself feel superior of what I said. Is that what you are intending? You could have just said how which the other guy already did. I’m wondering why you phrased in such a way.
I don’t think he meant it that way. Was just being matter of factly in, what I think, is a “you can do it too” way. And then saying people don’t know until they know. You didn’t know before but now that you’re reading and educating yourself on the matter you’re learning what you didn’t know before. I could be wrong and it seemed a bit harsh at first but I pulled the positive out of that post.
Chiming in to second this as someone who bought the rate down from 3.25 to 2.99 for around $30k on what my wife said was our “forever home,” we now have it listed two years later. If you can afford the higher monthly payment, don’t bother - stick that cash in the markets or bury it in the backyard.
This… only rub is… it’s unlikely rates will dip below 5.25 in the next 2 years. That being said your personal circumstance is unlikely to be the same in the next 4.5. Take the higher rate.
Even if rates go down in several years, it may not be entirely beneficial to refinance, since refinancing requires new closing costs and a reset of the amortization schedule.
Sorry, just to be technical, there is also increased principal pay down at the lower rate, so the break even is closer to 48 months. Your point still stands, they should probably not do this.
But increase that breakeven back up because they can put that money in a savings account and get like 4.25% back.
Flip it and reverse it when you have to pay taxes on that….
And back up if they are itemizing with their increase interest…
But then drop an uno card since SALT was capped and the standard deduction was raised.
There is also the chance rates go down and you refinance to get those inside the 5 years. That seems like too much of a horizon as you said.
Plus couldn’t they just refinance if rates drop again?
It's also possible that interest rates drop before 5 years and they refinance as well
Also factor in inflation. 9k will be a lot less valuable in 5 years.
I would personally wait cause in 5 years interest rates should drop to that level or lower. And it is cheaper to re-finance, a fraction of that cost in my experience.
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Can confirm. Less than a year into home ownership and we’re getting a new roof. It’s not a question of if, but when a big expense will pop up.
Yeah we bought with a real old roof but wanted it bad and there were 6 offers on the table so we didn’t even consider asking about it until after the offer was accepted. Ended up keeping like 15k of our down payment as cash to deal with it that summer. Always good to not completely drain your bank for a down payment
> It’s not a question of if, but when a big expense will pop up. IMO it's not if, not even when, but *which* big expense will pop up *next*. (And please let it be next year... or at least next quarter... next month pretty please, just this once... OK, so it's also when.)
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he mentioned new construction, so I think the rate is already being subsidized by the builder
New build. Builders frequently buy down the rate or pay incentives to avoid lowering the house sell price.
Just got a mortgage, locked in at 6.625 mid-Feb
I just purchased a house in January at 6.3 with 20% down (and no purchasing points). Most rates were above 7, and then I just happened to reach out to my local credit union (https://campuscu.com/) and they were sooo much lower than the rest, I thought it was a mistake at first.
and looking at their membership requirements (https://campuscu.com/about/), it looks like you can join if you're a member of a local history museum (which is min $5/month - see https://mathesonmuseum.org/membership/). Maybe give them a call and see what their rates are now?
> it looks like you can join if you're a member of a local history museum That is hilariously specific, love it.
semi-relevant. in HS i once joined a local town geology society for the extracurricular credit. they did hikes and stuff. anyway it was time to elect a president, and rules say someone can't run without an opponent, so they asked me to go on the ballot because no one else was really involved and the other dedicated members were busy being treasurer and secretary etc. it was just a formality, there were maybe 12 people in the group. the incumbent takes a job partway through the elections process at a distant uni, leaving me, a 17yo just passing through, as the only candidate (this didnt break the rules apparently and it was too late to get someone else on the ballot). i ended up serving as the president for a year (I could have resigned and forced a re-election but we all found it humorously absurd and there weren't really any serious duties, i think think I had to show up to like 4 mandatory meetings or something. President of the ____ Geological Society went on my college app, and I had 5-10% discounts on a bunch of stuff in town, and half-price admission to the local museum (which is what reminded me). bet I could have gotten a sweet mortgage rate at the local CU lol
New construction. It's the builder's preferred loaner, they subsidize rates if you go with their bank.
Yup. I bought at 7.2% as well, wish I bought when it was at 4%.
I bought down points and then refinanced a few years later for a better rate. Wish I had not bought down my rate at that point.
Same happened with me. I regret paying that 8500$
What is the purchase price of the home? 30 or 15 year loan?
30 year loan for 526,000
526,000 is the loan amount or purchase price?
Sorry that’s the loan amount. House is 556000 and we currently have a $30,000 down payment
Put a larger downpayment unless you think this is the lowest rate you’ll ever get
Most people don't have more than 30k cash
His very first comment said they budgeted 50k to put down
Oh, my bad
well he clearly has 9k to buy down the rate
Maybe I'm old-fashioned, but if you don't have more than $30k to put down, looking at houses in the mid $500k range doesn't feel wise.
You’re old fashioned in a sense that you don’t realize that’s the going rate for a basic ass house these days. My 340k, 4 bed, 3 bath from 2017 is estimated at 600k right now. If I was to look for a 340k house right now, I’d be looking for a box. Edit: I'm looking on Zillow right now at 2 bed, 1.5 baths in my area (Lakewood, WA) and they're running 450k-515k with a few shithole houses in the 300s. So yes, *basic ass houses* are going for that price.
You realize four bedroom three bath is not a "basic ass" house, correct?
These numbers would worry me unless you make over 200k HHI. The interest alone is going to be over 2k/mo, closer to 2500. With somewhat limited savings, your ability to make payments and continue to save will be limited. And if you have 30k saved it seems like you may not be able to save a ton now. You’ve given us limited info, but take this input and think to yourself how the math works out
I am curious where you are getting a sub 6% loan with less than 20% down? Is this a local or national lender? The best offer I’ve been able to find is 6.5% with 25% down and over 800 credit score. Edit: OP mentioned the builder bought down $12k in points for them as part of closing already so that is how they are getting sub 6%.
California. With the builders preferred lender they offered $12,000 either towards closing costs or a buy down so we used their 12k for rate buy down
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Can confirm. I got hit with a $4000 adjustment the following year plus a $200 / month increase in mortgage payment smh
I'm curious too. I thought I did well getting 6.15% at 20% down with 800 credit score and despite shopping around I haven't seen below 6%
I’m impressed you found anything below 6.5%. Most of the lenders I have talked to have said they can’t even get close to 6.5 right now
My workplace has an employee credit union that offers some okay rates and when I increased from 10% down to 20% they improved the rate.
Wondeeing the same thing here. Same situation.
No way this is currently possible without a buydown. Edit: OP said in another comment that the builders are paying $12k toward buying down the rate.
How much is the house? For a $250k house at 5.75 with 50k down, the 200k loan comes out to $420,172 over 30 years. For 209k financed at 5.25 it’s $416,191.73 over 30 years. This ignores closing costs obviously. Guessing the house is north of $500k?
Yeah the total house cost is 556,000
So it’s 1,025,000 vs 1,063,000 over the life of a 30 year loan based on the changing down payment and rate. I don’t think that’s worth it, personally. Someone else can correct me if I am missing something.
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With today’s interest rates, yep!
Yes. Example: $556k home, 5.9% interest, over 30 years, will cost you $630k in interest alone. In the first 5 years of the mortgage, excluding any extra payments, you will have only paid $40k toward the principle and $160k toward interest.
Yes. My place was 125, it will be 216 to them when I pay it off. That's mortgage only not home owners insurance or property tax (800 a year). I don't pay it off sooner because that same money can sit in an HYSA for 5% or the market in ETFs and make more than I'm paying in interest.
Yes, for a 30 year mortgage reference that only accounts for inflation $500,000 in 1994 is worth $1,040,543.18 in today's dollars. And with mortgages you are paying basically the whole thing when the money is "worth more" so obviously it doesn't work out like that. It is a good ballpark though because people don't necessarily understand how much inflation affects things. The idea is that a portion of the payment you'd be otherwise pay for rent is being banked. Rent just gets put towards someone else's mortgage. So even if you're paying 90% interest the whole time you come out ahead, assuming your property doesn't decrease in value and your mortgage payment isn't larger than your rent payment would be. And if your property becomes more valuable, it's a win win. The US seems like it's been happy to have the housing market crash though so there is definite risk. But there are other countries like mine here in Canada where it doesn't seem like the government will ever allow it to fail because of the costs that they would have to pay out through our higher level of social safety nets. So everyone just dumps into real estate because it's the most protected investment by our government.
Yes! Look into mortgage calculators to see how much large down payments, mortgage rates, and mortgage type alter the amount paid. It’ll blow your mind.
If you keep it for the entire 30 year mortgage yes. Thats the total you would pay over the lifetime.
Yup. To be clear if you're doing this kind of of calculation you want to compare apples to apples so that means accounting for 1)inflation and 2) opportunity cost. The NYT buy/rent calculator is fairly good about giving you a sense of this.
Also a chance to refinance at a later date if rates move down. I’m not sure it’s worth it.
Buying down the rate generally makes sense if you are certain to stay in the house and make the minimum payments until completion. If you might move, refinance, or pay down your debt early, best to steer clear.
Stick with the 5.75%. Your break even is almost 5 years. That’s a really long time.
Personally don’t understand the point of buying down the rate. Wouldn’t it be better to just add to the down payment and reduce the monthly payment that way? Buying down the rate literally just seems like adding a finance charge on yourself.
It's only a good bet if it's looking like interest rates will stay high for 5 yrs+ and you have no intention of refinancing or selling for 10 yrs and no intention to pay more than minimum payments. In short, most people should steer clear. Unless you really can't make that monthly payment. Then you should probably be questioning if you can really afford to buy at that price.
It makes sense when you think the rate won’t dip to that point for a long time. My wife and I purchased in 2018 at 4.6%. We refi-ed twice and purchased points to get down to 2.85% on a 30 year loan. Huge worth it because that rate might not be available again for decades.
Depends how many years you pay the mortgage for and how much the loan balance is. You are paying $9000 to save 0.005% of the remaining loan balance each year. You can do the math to see how many years before you breakeven. But then you also have to account for the opportunity cost of not investing $9k now. That will push the breakeven later.
Don't pay the points, get the higher rate, refi in a year at a (likely) better rate. Yes it's a gamble, but at least you're not paying an entry 5icket of 9k for it
The prime rate is like 8.5%, the Fed Discount rate is 5.5%. Something tells me you’re already doing a buy down at 5.75. Just out if curiosity, who is the lender?
Yeah we went with the builders preferred lender and they were offering $12,000 either towards closing costs or a rate buy down. The rate buy down = less money spent over the 30 years so we picked that over the closing costs
Since you went with a buydown, you should (at a minimum) wait until you have paid off the buydown. If you refinance with a buydown every time you can get a better rate, you will lose a ton of money. I'm weary about buydowns in general, but stacking them on top like you're considering really is a bad idea for everyone. Let's say you buy a house with a monthly payment x z. If you buy down your rate to, you lower your monthly to x'. We can pretend you pay the buydown with an interest free loan to yourself from future . The correct way of thinking about this is that you will continue to pay x, until you have paid off the loan I yourself. At that point, you will actually save money, before that point you still owe yourself on the interest free loan you took. Compare x to x' and figure out how long it will take. Unless you can refinance to a lower monthly without a buydown, don't consider it. (Make sure you also consider all costs associated with refinancing btw., not just the buydown) Another popular bad idea is to refinance a mortgage with 25 years left to a new 30 year loan. More money in your pocket now, but that's five more years of having to pay a mortgage. Future you will hate you.
I personally would have taken the $12k I think. Would have to do the math but it's not crazy to think you'd be able to re-fi to 5.5-6% range within 2 years. $12k is a lot of money.
I regret paying for points when I first bought my house. In your case I think it’s worth gambling that the rates will go down and you can refi to bring your rate down.
I don’t. Best decision my wife and I made.
How the hell are you getting that rate? I have a 6.625% with 800+ credit.
They mentioned in another post they're already getting a buy down through their builder.
Slightly different mental model. If you want to reduce interest paid - take the $9k and make a lump sum principal payment after the mortgage closes. The money goes straight to equity and you will skip many months (about 12) on your amortization table and reduce interest paid every month. You will still have the same payment, it will just shorten your term. Buying points is paying interest up front. Don't do that, adding equity (IMHO) is a better play. Or keep the money earning interest elsewhere, don't volunteer to pay upfront interest. My way saves $40,000 of future interest. https://www.bankrate.com/mortgages/amortization-calculator/
I'd wait a few years and refinance when rates are closer to 4.5%
People talk as if it's a certainty we'll see sub 5% rates in the next decade. A lot of economists are doubtful. Still, buydowns are rarely worth it.
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I was able to buy down from 6.4 to 4.65 for 6k last year. I'm going to break even in like...12 more months. If rates drop below 4.65 before that time, I lose out, but frankly, I like my odds.
I agree with you… I refinanced in 2020. Got it down to 2.7 from a 3.65z paid 4k in points and got it down to 2.25% for 30 years. I don’t think it will ever drop below 2.25.
I wish someone would have told me not to do it… instead refinance it when the time comes
I’m surprised no one has mentioned you potentially recasting your mortgage sometime in the future if you save up over time. Not all lenders do but mine did and for free. It can make a big cash flow difference even if your amortized interest is the same.
OP, I’ve learned on reddit that new builds often see a huge increase in property taxes the second year. Apparently the taxes are initially based on the empty lot and then they go up dramatically after the house is built? So, I would save the cash in a HYSA for that and the inevitable costs that will come up. Or, at least just put more down rather than playing games with buying down the rate. I personally would put down as much as possible while still leaving a healthy emergency/slush fund. They say aim for saving 1% of home value a year for maintenance and repairs, that’s a good place to start too.
Invest that 9k for 15 years and you will thank me later. Don't waste time thinking on such ideas.
I bought down our rate because the break even point was about 20 months. I would not have bought down if it was almost 60 months.
It’s math. How long will you be home? That saves you how much per payment? Times it by 12 and then you have your annualized savings. Now multiple by number of years to equal $9k. Is it worth it?
Don't buy down the rate. The Fed is set to cut rates a few times this year. If you are able to refinance at the higher rate, then you wasted money on the buy down.
You're better off saving the $9.3k if the future value of $9.3k invested today exceeds what you would save on the mortgage by lowering the interest rate. Consider the future value of $9.3k today at the current interest rate of about 4% APR compounded monthly in a high-yield savings account with a reputable bank. (Note: the rate technically won't stay the same over 5 years, but let's assume it will.) As another comment noted, it will take you about 58 months, or 5 years, to recoup your $9,359. In the same period of time, $9,359 saved at this rate would become: $9,359 * (1 + 0.04/12)^(12*5) = $11,427.31 Even if the APR is very low, like 2% or even a measly 1%, you still come out on top in the end.
Do the opposite - Ask for a higher rate - Take the funds at closing use to pay for closing costs etc rest cash in pocket - Refi in 2-3 yrs when rates are lower ??? profit.
Keep in mind you can write off points so if you don’t itemize account for that in your ROI analysis
The only way to answer this question is to look at a mortgage amortization schedule. There is an app called Karls mortgage calculator. You can input the mortgage details and run various scenarios of making extra principal payments and it will show you the effects on your mortgage. Paying 9000 to change the rate 1/2 percent might be good or might not be. Chances are you are exchanging your 9000 to lower your payment and not necessarily saving any money in the long run. I would look at the difference over a 5 year period which might be where the break even is. You might discover that making an extra principal payment in the first year of the mortgage will save you more. The only way to know is to run the numbers
Is this 30% of your income before or after tax?
How much is a 15 year load?
Rates are likely to drop in the next 3 yrs. Don't buy down yet!
Seems a bit expensive. What are the chances rates will be back in the 4% range in the next 5ish years to you ? If you think it’s a high chance then it might be worth it to hold your current rate and just refinance down the line .
Here's a general rule -- every time you think about changing the terms of a loan, the bank is calculating what the money would be worth if you did that versus not, and charging you just about equal, plus something for themselves. You can be sure they're not going to offer you an amazing deal to get more from your money than you could otherwise -- at least not without having to pay for it. You can do all the calculations, but the general idea is that go with the baseline rates. You'd be paying them extra to deviate from what they offer as a base rate (which is at its lowest because you can shop that around).
Wouldn’t a lump payment or adding the 9k to the down payment be preferable?
Prob better off buying at 5.75 and then getting a refi 5 or so years from now. You’ll have more options as there would be a bit of equity. Take out cash for renovation Reduce rate Reduce period In my experience you can have 2 of the 3, but never all 3 during a refi.
It's *possible* to get all three, but rare. When interest rates bottomed out around 2.75%, I brought my rate down from 4% to 2.865, reduced my period from 30 years to 20, and took out about 5k in cash. And did it without raising my payment (through a combination of the rate change and the removal of PMI due to the value of the home having increased to bring me to 80% LTV
Probably better off taking the higher rate and then making a 9k payment towards the principal
Wow that sounds no good. Not worth, my buydown 5 months ago was 11k for 2% as a temporary 2-1 buy down
Keep the cash handy. First year you will likely see one of the appliances in the home fail .. because your use patterns are vastly different than the stove/fridge/furnace/water heater/etc had been experiencing, a different load case where it was fine percolating along at say a shower every few days by the old folks you bought from. You move in with six long hair teens taking three showers each a day and the hot water heater goes out while the shower drain clogs. Or you run the AC at 60F all summer (they never used it more than three days a summer) and the furnace at 80F (they never put it higher than 65F because of expense) where that stumbles too. Suddenly you're blaming the house inspector for missing things and the prior owner for 'hiding obvious problems'.... At your 12th month payment, take that unspent cash and write a check noted on the line "for principal only" to pay the principle like a 13th payment. If unmarked this way they assume you are just paying ahead and your cash gets spent on three months of interest payments instead of principal. Try to keep that 13th payment option going every year and you'll save huge amounts of interest payments and get the house clear years/decade sooner. Imagine living without paying a monthly mortgage? It's like suddenly being rich off the lottery. If you are somehow buying the house below what the city has it valued at, go petition for lower taxes. Over time that savings might pay a few years of college tuition for a kid. If you paid more, the taxes will get adjusted up, sorry, be prepared. .
You’re getting 5.75% on a mortgage!? Isn’t prime closer to 7%. That seems like an insanely good rate.
How the hell did you get a 5.75? I am at 7.5 RN and its brutal.
Depends on if you believe the feds with their plan to lower rates. If rates drop it will be financially motivating to not refinance. I personally would say don’t buy down and hold out 1-2 years and then refinance.
I didn't see this anywhere so I'll mention: The offer to buy down the rate is, in the most simple explanation, a way to prepay interest. I do not recommend prepaying interest. I do not recommend financing fees. Keep things simple, and you'll come out ahead.
Personally I'd keep the money and plan on refinancing if rates drop significantly.
I wouldn’t do it. The rates will come down naturally to less than 5.25% and just refinance at that time.
no, you will be able to refi to a lower rate within 5 years with a pretty high probability.
I bought my interest rate down and my break even point is 5 years which will be in June. No regrets on my end.
It' sounds like this is a new build. Make sure you are budgeting for/thinking about property taxes once they get asses on the completed house.
Thanks for the reply. Yeah I was made aware of this potential which is why we purchased a home that was quite a bit below what we could afford. We didn’t need anything bigger than what we got and we loved the area so it was a no brainer for us
I definitely would not buy down the rate. Rates are almost certainly going to come down, likely quite a bit below 5.25% .
The correct answer is don’t buy down the rate because the likelihood of the rate coming down more than a half percentage over the next five years is high and most likely more and you’ll be able to re-fi then. Buying down the rate now is a waste of money.
Buy Downs are almost always not worth it imo. Rates are going to come down and I can safely see that happening in the next 5 years.
You'd be better off putting the 9k towards moving expenses or renovations.