Should I buy down interest rate?

Question

I just got a deal for 3 beds 2 bath rental property for $247,500. The estimate rental is about $1,550-1,700.

My interest rate is 6.375%. My lender want me to buy down 1% with $1,800 Which make my interest 5.375%.

I asked my lender if I want to buy more down how much it will be. He said for 2% down is $4,990.My question is which one should I choose 1% or 2%?

And it is wrong idea to buy down interest rate?

thank you

Justin R. · Answer

There is a simple trick for comparing rate buy downs.

1. Figure out your annual principle and interest payments over the first year with Par (no rate buy down)

2. Figure out your annual principle and interest payments over the first year at the buy down rate

3. Whats the difference?

4. Divide the cost to buy down the points by the difference and you will find out how many years it takes to break even. If you hold the home longer than this and don't plan on another refinance than it may be worth while. I typically buy it down only if it pays for itself under 30 months time.

Bill F. · Answer

I like @Justin R. quick rule of thumb. But I'm a finance nerd and couldn't leave well enough alone.

@Jared Rine's intuition is 100% spot on. You break even Year 1 buying the loan down 1%. Buying it down 2% breaks even somewhere in year 2-3.

If you plan on holding it longer than three years, buy the note down 2%.

Here is the math for any excel nerds out there:

James Loffredo · Answer

Is there a reason your rate is that high to begin with?

Josh Thomas · Answer

I have 800+ score and finding that traditional multifamily investment loan rates have skyrocketed and are steadily increasing by the day. In December last year I picked up multiple loans in Ohio at 4.25%, whereas my rate today is 5.95%. ARM and 15 year options aren't much better than the 30 year fixed. So 6.3% isn't that far off, depending on your area.

Search for "google sheets loan payoff calculator template" to help you compare rates.

Jared Rine · Answer

@Leewood Chan..I'm assuming that's dscr lender, as the terms sound pretty in line with what's typical in the market right now.  As to answer your question generally - if you're going to hold the property for longer than a few years, then take the max buy-down.  Your recoup on the cost vs. payment savings breaks even at the 2 year mark if it's only costing you 2 pts.  It's a no brainer, especially if you're taking interest-only.  Make sure your lender is telling you the right numbers though as your buy down's sound off. Most lenders are a 2 to 1 buydown, with a max of 1% to the rate, depending.  So a 1% decrease in rate = 2 pt cost. Some lenders are worse than that meaning that your time to recoup will be a little longer. Just my $0.02

Jonathan R McLaughlin · Answer

@Leewood Chan

Depends on your credit score but your buysown basically gets you to the going rate, just sayin.

If u don’t have an ongoing relationship with That bank and your credit score is comfortably in the 700s I would shop around.

Leewood Chan · Answer

Thank you for explain and number in the excel.

Leewood Chan · Answer

My credit is 700+. I already have two properties from that lender. I think might need shop round this time to see what the different.

Thank you for your advice.

Leewood Chan · Answer

Good question, I will try to ask my lender.

Thank you

Should I buy down interest rate?

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