Interest rate points

[Jerry Santiago]

Hello, my name is Jerry Santiago and I am active duty Air Force. I am a real estate investor in Rapid City, South Dakota. I am in the process of house hacking a new property (single family home) that it’s currently in foreclosure. The property needs about $10k in renovations to bring it back to standards. The property is $259k (3 bed, 2 bath) and the approximate monthly payment will be around $2400. With the interest rates increasing to almost 8%, is it worth buying down points to bring my monthly payments down to $2000? I would have to buy almost 2 points which is about $6500. I’m sure that after the renovations the property will most likely be $310k, compared to the property around. Thank you. 

[Sasha Mohammed]

hi @Jerry Santiago, mortgage broker here! Truth is, no one can tell you "yes" or "no" on this one. I always tell my clients there is no one size fits all with mortgage, and it's very true. one person i explain points and rate-buy-down to, they say "you'd have to be nuts to do that" and another client would say "buy it down as far as i can go, don't care how much it costs". 

what i recommend is doing the math on the recuperation period. so in your example, if the cost is $6500 to save $400 per month, how long would it take you to recuperate the $6500 in added cost? $6500/400/12 = 1.35 years. essentially if you took that $400 per month and put it in a savings account, it would take you a little over 16 months to recuperate the $6500 you spent, meaning you would have to stay in this LOAN for at least 17 payments to have seen the benefit of buying down the rate and prepaying that interest up front (lets not kid ourselves, prepaying the interest up front is what you're doing). 

this is just one way to calculate this tangibly. but there are other factors. Personally, i purchased in Sept of 2021, and i bought down the rate on my own loan. this was because i work a commission-only job, and market swings can make my income unpredictable at times. i wanted the stability of having a lower monthly mortgage payment, even if i ended up refinancing before i met my recoup period. And boy am I glad I did! 

the above scenario, 1.35 years to recoup is not bad at all, but i guess the followup question back to you is -- do you expect rates to come down next year? do you plan to sell or payoff this loan (refi, or lotto win) before meeting the recoup? if yes, then it may not be worth it. But really only you can make that decision for your specific situation. 

Hope this was helpful!

[Jerry Santiago]

Hello Sasha, thank you very much for your reply. This really helped out a lot. It’s a really great way of thinking it that way. I am honestly, not thinking on selling the property before the recoup period. I’m also thinking on using part of the property as a short rental which could cut that period in half. I also don’t think the interest rates are going to go down next year. After your point of view. I don’t think it will be a bad idea to buy down a few points just to get a little cash flow in the long run. Thank you again 🙏.

[Aaron Schrader]

@Trent Gonzalez

[Trent Gonzalez]

Thank you @Aaron Schrader,  what @Sasha Mohammed said is a great way to look at it. I would also say to always be aware of what the rates are and don't think of this mortgage or really any mortgage as a permanent thing. In the future it might be that the math works to refi, whether that is to drop your payments with a lower rate or keep your payment the same and cut years off the term with a lower rate. When or if it comes time to refi or purchasing shop your options, I would say not all lenders are created equal and what I mean by this is with Sasha and I both being brokers we may have options that your hometown bank or credit union may not, and what it cost to buy down the rate is different from lender to lender.