Is Buying Down Your Mortgage Rate Worth It? My Approach to Analyzing the ROI

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Is Buying Down Your Mortgage Rate Worth It? My Approach to Analyzing the ROI

Mitchell Hein
Investor · Bryan-College Station, TX · Member since 2020 · 27 posts · 27 votes

I recently analyzed mortgage rates to see which option would offer the best return on investment and balance between monthly payments and long-term costs. 

Loan and Property Details

  • Purchase Price: $355,000
  • Down Payment: $17,750 (5%)
  • Loan Amount: $337,250

I used local estimates for taxes, insurance, and PMI to calculate the total monthly payments.

Rate Comparison Breakdown

The buy down costs for each rate were provided to me by my lender on Oct. 22. Starting at 7.125%, each 0.125% rate decrease lowers the monthly payment by about $28.39. Here's a breakdown across different rates, showing monthly payments, cumulative costs over 5, 10, 15, and 20 years, and Year-over-Year ROI over those same periods.

Based on the numbers, I chose the 7% interest rate. Even though the other buydowns lower the payment more, the 7% seems to be the best bang for your buck. The buydown costs increase significantly after 7%, which decreases ROI considerably. The ROI is a YOY calculation based on the initial investment of the buy-down cash.

I am curious to hear others' approaches to deciding whether or not to buy down the interest rate and by how much. These are just my personal calculations so I am also open to any suggestions on what I may have missed or not considered here!

Here are the full numbers:

Interest RateTotal Monthly Payment5-Year Cost10-Year Cost15-Year Cost20-Year CostCost to Pay Down5-Year YOY ROI10-YOY Year ROI15-YOY Year ROI20-YOY Year ROI
7.125%$3,386.17$203,170$406,340$609,510$812,680$0.00————
7.0%$3,357.78$201,467$402,933$604,400$805,866$421.5612.16%7.08%4.94%3.79%
6.875%$3,329.39$199,763$399,526$599,290$799,053$1,686.254.08%3.04%2.25%1.77%
6.75%$3,301.00$198,060$396,120$594,179$792,239$2,950.942.93%2.46%1.86%1.48%
6.625%$3,272.61$196,356$392,713$589,069$785,426$3,372.504.08%3.04%2.25%1.77%
6.5%$3,244.22$194,653$389,306$583,959$778,612$5,058.752.73%2.37%1.80%1.43%
6.375%$3,215.83$192,950$385,899$578,849$771,798$6,745.002.06%2.03%1.58%1.27%
6.25%$3,187.44$191,246$382,492$573,739$764,985$8,009.691.95%1.98%1.54%1.24%
6.125%$3,159.05$189,543$379,086$568,628$758,171$8,431.252.47%2.23%1.71%1.37%

Smaller table for mobile:

Interest RateTotal Monthly PaymentCost to Pay Down10-Year YOY ROI20-Year YOY ROI
7.125%$3,386.17$0.00——
7.0%$3,357.78$421.567.08%3.79%
6.875%$3,329.39$1,686.253.04%1.77%
6.75%$3,301.00$2,950.942.46%1.48%
6.625%$3,272.61$3,372.503.04%1.77%
6.50%$3,244.22$5,058.752.37%1.43%
6.375%$3,215.83$6,745.002.03%1.27%
6.25%$3,187.44$8,009.691.98%1.24%
6.125%$3,159.05$8,431.252.23%1.37%
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  • Kerry BairdPro Member
    Rental Property Investor · Melbourne, FL · Member since 2011 · 3k+ posts · 2k+ votes
    1y

    Looks to me as if you made a good decision on the interest rate.  What about the rest of the deal?  5% down is for an owner occupant, and my guess this is for a single family residence.  What is your plan for this property? 

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  • Patrick Roberts
    Lender · Charleston, SC · Member since 2019 · 1k+ posts · 1k+ votes
    1y

    Generally, decisions around buydowns come down to three things: 1) the breakeven period on the buydown, 2) how long you expect to keep the property and loan, and 3) your personal risk tolerances. The breakeven period is simply the recapture period - how long (in months) does it take to recover the cost of the buydown with how much you save per month. This goes hand in hand with how long you expect to keep the loan - if you know you will be selling/refinancing/whatever in short order, a buydown probably doesnt make sense. 

    The third thing is the most overlooked - buying down the rate is a form of hedging interest rate risk. It's like an insurance policy. When you buy down the rate, you prepay interest in return for a permanently lower rate. You're inherently making a tradeoff - you're accepting a known cost now for lower expected total costs down the road. Despite what everyone in the market is saying about rates coming down next year (just like they were going to come down at the end of 2023 and in 2024), there is no guarantee that rates are lower in the future than they are right now. If you can get into a rate that works for you for a buydown with a reasonable cost, it may make sense for your situation. This goes back to the breakeven period and your planning. 

    Generally, my advice to my clients is that if the breakeven period is under two years, it's worth considering, and if the breakeven period is under 15 months, it's probably the right move if you plan to keep the property for several years. At a breakeven of 12-15 months, you're hedging rate risk for next to free. If the market turns against you and rates continue to climb, you save in the long run. If not and rates come down in the next year or two, the cost is minimal. 

    Tons of lenders will stand in line to tell you that buydowns when "rates are going to drop next year" are a waste of money. The reality is that this is like saying that buying an insurance policy for your house is a waste of money because "you know it wont burn down in the next year." It's a conscious decision about the trade-off between cost and risk. 

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