$12,000 buy-down vs. $12,000 off?

Posted: March, 17, 2023 | Categories: Blog | News | Tips & Trends

In this article, I will address pressing questions you never knew you had like, what the heck are mortgage points? What's a buy-down? Isn't it better to just get a smaller mortgage in the first place?? And we will use a real-life example to help us understand. First off, points.

POINTS:

No free-throw skills are required. ?? Yes, in the lending world, you get to buy your points!

How much are they? 1 point = 1% of your loan total

Why do I want them? They secure you a lower interest rate for the entire life of your loan!

How much lower? About 0.25, however, this does actually change like your interest rate. Talk to your lender for the latest and greatest!

Mortgage points provide a permanent reduction in your interest rate, which can help you save money over the life of the loan. If you expect interest rates to decrease significantly in the next few years, you may not want to pay for a permanent reduction in your interest rate at today's higher rates. Unfortunately, we can't tell the future, BUT if Smart Dwellings is offering to reduce your rate [hint, hint] this is a win-win!

3-2-1 or 2-1 BUY-DOWN

A buy-down means you are investing a large lump sum upfront to secure a lower interest rate for a set amount of time, generally 2 or 3 years. For example, with a 3-2-1 buy-down, if your approved rate is 7% the first year you would only pay 4%, the second year 5% and the third year 6%. Years 4 and onward you pay the original 7% interest rate.

A rate buy-down provides a temporary reduction in your interest rate for a specific period of time. But be careful to plan ahead for the full mortgage payment.

MONEY OFF

Why not just take the option of a smaller loan to begin with? Well, it's all about the math. Let's use an example of 420 Rodeo Ct, valued at $282,400 with a 7% interest rate

Mortgage Payments

STANDARD: $1879 - The normal mortgage payment with a 7% interest rate is $1879

POINTS OFF: $1693 - Let's say we'll buy our rate down by 4 points, or $11,296, and get a 6% interest rate. That would decrease our monthly payment by $186!

MONEY OFF: $1799 - Reducing the loan amount by that same amount to $271,104 and keeping the original 7% interest rate gives you an $80 savings over the standard payment.

3-2-1 BUY-DOWN: $1348 for the 1st year, $1516 in year 2, $1693 in year 3, and $1879 for years 4-30. This will run about $12,950 upfront.

THE COMPARISON:

(Quick fun fact before we begin: as of 2021, Americans are staying in their homes for a median of 13 years. So, for our savings comparison, we will use a period of 13 years.)

STANDARD: $0 (no savings)
POINTS OFF: $29,016 (total payments under standard option minus total payments under points off option)
MONEY OFF: $12,480 (total payments under standard option minus total payments under money off option)
3-2-1 BUY-DOWN: $12,960 (total payments under standard option minus total payments under 3-2-1 buy-down option)

The clear winner here is to get points off! Now, every situation is a little different so we definitely advise you to talk to your lender or one of our preferred lenders!

lions tigers and bears? No, we're talking bout rates, points and buy-downs