Should You Buy Down Your Rate? Not if I have anything to say about it!

So your loan officer, agent, friend or family member has told you to buy down your rate and you are wondering why nobody told you sooner!

If you had only known it was possible you would have bought down the rate on every loan you have ever taken out!

Before you commit to this course of action take a minute and take a long look at the numbers and see if it is really in your best interest.

A client of mine is currently being pressured to buy down his rate by the loan officer he is using. This is a new construction deal on a home he desperately wants, but isn't thrilled about the way the payments are coming out. I would prefer he worked with a lender I know and trust, but he will not get the closing cost contribution if he doesn't use the builders lender.

Now, I have never been a fan of buying down the rate, not even when I was a loan officer. But like everything else on this blog, that is my opinion, so lets take a look at the numbers.

(these aren't the actual numbers but you get the idea)

Loan amount of $315,000 on a purchase price of $350,000
They have offered him a 1/2 point buydown for 2.5 points or roughly $7900

Mortgage payment before the buydown - $1889
Mortgage payment after the buydown - $1788

So yes you will save $100 a month, sounds great. But what about the fact that it is costing you almost $8000 to save that.

That means it will take you 79 months or 6.5 years to realize a savings equal to what you paid out up front. That is if you stick that 8K under your mattress, instead of investing it or even just a normal savings account. Or maybe you use the money to buy furniture for the new house rather than open a 18% retail credit card.

If a stranger walked up to you on the street and offered to pay you $100 a month for 6 and a half years if you gave them $8000 today would you even consider that? (if you would please email me ASAP)

I have heard the argument before that the $100 a month is significant savings and makes the home more affordable. My answer to that is always the same, if $100 can make the difference between affording a home or not, Can you really afford the home at all?

Date: Tuesday, March, 4th 2008 @ 07:11:00 PM
Views: 150

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