I just purchased my first condo at int rate was 5.8% - do I buy points to get this down a bit or leave it and refinance in the future if rates go back down? HELP!
Tough question to answer without knowing your time horizon and your exposure to other vehicles of investment.
Re: Time Horizon, for the average 30 YR Mortgage, 0 to 2 points are generally worth paying up front if you intend to stay in the loan for greater than 5-7 years. But this is without discounting or accounting for inflation. In today's economic environment, we have an inverted yield curve and inflation at 9% - so neither are none-factors by any means.
Re: exposure to other vehicles of investment, think opportunity cost. If you don't buy down your rate - what else would you do with the money? Would keep it in a low-yield savings account? If so, buying down the rate is probably a good option. If you are someone who invests in stocks or bonds or other securities and have somewhat consistently generated returns, keep the cash today and go that route not only because of the higher return but also the added liquidity.
Realtor · San Antonio, TX · Member since 2021 · 150 posts · 107 votes
4y
Congrats on the purchase. See if the seller can contribute a concession to buy down on the rate. Your lender should be able to give you options if the seller agrees.
Real Estate Consultant · Seattle, WA · Member since 2022 · 1k+ posts · 784 votes
4y
All depends on how long you plan on holding it. Run the math two ways - interest paid without points and interest paid with points plus the cost of the points. You break even when one equals the other.
If haven’t closed yet yes ask the seller to give you a credit towards interest buy down
Tough question to answer without knowing your time horizon and your exposure to other vehicles of investment.
Re: Time Horizon, for the average 30 YR Mortgage, 0 to 2 points are generally worth paying up front if you intend to stay in the loan for greater than 5-7 years. But this is without discounting or accounting for inflation. In today's economic environment, we have an inverted yield curve and inflation at 9% - so neither are none-factors by any means.
Re: exposure to other vehicles of investment, think opportunity cost. If you don't buy down your rate - what else would you do with the money? Would keep it in a low-yield savings account? If so, buying down the rate is probably a good option. If you are someone who invests in stocks or bonds or other securities and have somewhat consistently generated returns, keep the cash today and go that route not only because of the higher return but also the added liquidity.
I just purchased my first condo at int rate was 5.8% - do I buy points to get this down a bit or leave it and refinance in the future if rates go back down? HELP!
As others have rightfully said, run the math vs. the length of time you plan on being in the property. All you basically need to do is calculate the cost of the points vs. the savings in monthly payment and determine your breakeven period. DM Me if you need additional assistance in how to calculate this.
Lender · Seattle, WA · Member since 2014 · 2k+ posts · 899 votes
4y
do the breakeven analysis .....divide the costs of the additonal points by the monthly savings .....this will give you the number of months it will take to recover the extra costs ....if you plan to keep the property and the loan longer than this breakeven period ( and you have the extra cash ) - then you might consider taking the lower rate .....mot of the time buying down the rate doesnt make much sense ( unless you have a change to do it when rates are already super low )
I just purchased my first condo at int rate was 5.8% - do I buy points to get this down a bit or leave it and refinance in the future if rates go back down? HELP!
I think it is about the numbers. Have you run the numbers? Will you be able to get cash flow if you do not buy down the points? I would not bank on the rates going down. It is always wise to plan for the worst but hope for the best. Here is the calculator I like to use https://www.calculator.net/ren...
Scottsdale, AZ · Member since 2019 · 434 posts · 248 votes
4y
@Rose Frantz - I strongly argue for clients to NOT pay any discount points. It is not as simple as - how long do you want to keep the home. People refinance far more often and much more frequently than they think. Most people do not keep a mortgage for over 3-4 years. Cash out, drop a rate, unforseen circumstances/life happens, etc. Unless the discount points have a sub 3 year breakeven, I do not think it is worthwhile (Unless you have concerns about your ability to refi in the future).
Could you image paying 2% in discount points for an awesome rate, only to hear in 6-12 months rates dropped and everyone is getting that same rate or lower for a no cost refi? That is a big cash burn!
Of course, there are no guarantees that mortgage rates will come down, but most economists agree that post Fed rate hikes - the economy slows, inflation comes down - and mortgage rates historically come down as well.
Lender · CA TX AZ MA · Member since 2022 · 42 posts · 30 votes
4y
There's a corny saying lenders often use which is "marry the house and date the rate". If the seller is providing a credit then go for it. However, if you are buying down the rate with your own funds, you will definitely want to look at the break even point and consider a few external market factors. A lot of major economists still predict rates will fall within the next 12 months. Something I don't see talked about as much is China's currency crisis. They are currently experiencing bank runs en masse and clients refusing to make payments on their loans en masse. Either issue alone could easily collapse a banking system, and if China is unable to fend off the collapse, it would be horrible news for the world economy and cause severe economic hardship for anyone who relies on them for trade and commerce. This type of terrible news is what would bring rates down in the US (as negative economic news always does) along with all the capital that moves to the US in order to escape the risks posed by a potentially collapsing economy. All that to say, it would be horrible for the broader world if the Chinese are not able to fend off such a collapse, but we would likely see rates drop. Therefore there is a strong chance you will have the opportunity to refinance into a lower rate (at no cost) in the next year and paying points now would not benefit you.
Real Estate Consultant · Seattle, WA · Member since 2022 · 1k+ posts · 784 votes
4y
it seems like people have been talking about the economy in China failing for one reason or another for decades now. Yes, the effects will be major and global (beyond what we are seeing with supply shortages as a result of COVID) but we haven't seen one yet...