Buying points for better rate

12 Replies

Hello

Is it worth buying points to bring you rate down? So I’m in the of buying points to bring my rate down but not sure if I’m making a wise decision. I need to spend 7k to go as low as 3.25% but $7k is a bit a lot of money to buy points. What do you guys think I should do

What your plans with the property? Do you plan to hold it long term? Are you planning a BRRR?

If you plan to hold it long term and BRRR it, buying the rate down never pencils out.

Also talk to your LO and make sure it will pass points and fees test.  Might not pass unless its a big loan amount.

I am redoing my own homeloan right now and my lender was very easily able to tell me exactly how many months each buy down level would take to pay off. It really helped put it in focus. I was willing to spend 3 points to buy down almost .375% because it was about a 7 year payback, but I plan to stay for at LEAST 15 years or more. Same would hold true for rentals.

I bought points for one of my property and my calculation was giving around 5 1/2 year to make it worth it. As it was a keeper for the long term, I did pay it. But now with the mortgage rates dipping again, I need to calculate if it worth doing a refi. Obviously with the points that I bought it make it less advantageous to do so.

With rates as low as they are right now I prefer cash in my pocket. If you are going to do a BRRR, I would never buy the rate down with a 7 year pay back, just doesn't make sense on paper unless i'm missing something like the property doesn't cash flow. If the property doesn't cash flow I would pass on the deal.

My personal opinion (not saying I'm right) is too many times people get stuck on the interest rate thinking that's the way to get the best deal.  At the end of the day, you know your long term goals and objectives so I can't comment on if it's a good idea or not.  Run the numbers and if it makes sense to you and your goals, go with it!

@Juan Carlos Garcia

I woukd ask yourself a few questions. What is your overall REI goal? Does having a little more cashflow from that property help you reach that goal? Or, does using that $7K in another way (e.g. downpayment on another property, value-adds to existing property, etc.) help you reach that goal?

It is hard to say if paying points makes sense in every scenario.  But just off of averages I would like to help people understand if it makes sense to buy down a rate.  

The average person in the U.S. owns a home for about 10 years.  That average changes all over the U.S.  If you can recoup the cost of buying down the rate in 5 years, I think that it is always worth a look. 

If you are deciding whether you should buy points or use the money as a down payment, that too is about your situation. If you plan on doing a cash out refinance later on down the road, a down payment would get you closer to the 75 - 80% LTV's that you need to do a cash out refi.

Cash out refinances usually have a rate hit as well.  So getting a lower interest rate in the beginning, only to have it jump a point after doing a Cash out refinance would be counterproductive.  A larger down payment would be more helpful than buying down the interest rate in that case.

But if you want your property to cash flow as much as possible in the very beginning, then a rate buy down would produce that result better than a larger down payment in most cases.

@Juan Carlos Garcia

Just do the math:

What is the exact interest cost of your estimated holding period at current rates?

What is the new interest cost at the reduced rate?

Is the difference greater than 7k?

I would recommend not doing it unless the difference is substantially more than 7k.

You’re considering tying up more money- that 7k could get you 1/3 of the way to a new property, and I’m betting the new property will cashflow you more than your interest savings might.

Plus, you may decide to sell the property sooner than expected.

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