Buy down our rate, or take home extra cash at closing?

Question

We are under contract for a primary SFH for $455k (asking $480k) with 6% concessions, or $27,300. We are using FHA with 3.5% down, or $15,925. Current interest rate is 6.75% and a 3/2/1 buy down costs $19,929. This is a move-in ready "worst house in the best neighborhood" situation, and the wall-to-wall carpeting is positively oozing with potential. We would not make any reno moves until we've lived there months, or maybe years, to figure out exactly what we'd like to do with it. Trying to work out the numbers with regards to our plans for the house. Of course we'd want to wait until after we renovate to refinance. Would it be in our best interest to take the buy down and save on the monthly payments, or take the extra cash at closing which we would just sit on until we figure out our renovation plan? Thaaaaank youuuuu and Happy New Year!

Caroline Gerardo · Answer

If you refinance or reno later the money for the 3 2 1 is wasted

Take pie when pie is passed. Put the cash into the bank or pay all the closing costs plus a couple payments in reserves.

Kevin Sobilo · Answer

@Jamie Warcken, buying down the rate is good ONLY when you feel certain that you will not be taking any "actions" for a fairly long time and by actions I mean things like selling or refinancing.

First figure out what buying down the rate will cost and then the difference in payment and see how many YEARS it will take just to recoup that investment. That doesn't even factor in the time value of money because you could have used that money elsewhere. So, if that if the break even point is 3 years, its more like 4 years.

If you think its possible or even likely that you could sell or refinance in that time or even somewhat longer then it really makes no sense. Keep in mind the average buyer keeps a property only around 7 years!

Raymond J. Rodrigues · Answer

@Jamie Warcken 6.75% interest rate seems really high for FHA. Last time I checked they were in the high 5's, low 6's. Where are you buying?

Jamie Warcken · Answer

@Kevin Sobilo @Jon A. OMG such great points. THANK YOU. We will be taking the cash at close!

Jon A. · Answer

Good luck @Jamie Warcken!

RE the refundable portion of the buy down, that doesn't change my opinion unless the bank will provide a refund even if you refinance with another lender. Who's to say that your present lender will have the best rates/terms when you go to refi?

Daniel Johnson · Answer

Personal view on it is that if you are renovating/adding value, there is a high likelihood of refinancing down the line at an equivalent or better interest rate. I would save the cash to improve the home and keep a close eye on interest rates for refinance opportunities. I’ve never been a big fan of buying rates down unless you are 100% sure you will be in the home with the same mortgage in 15 years.

Kevin Sobilo · Answer

@Jamie Warcken

Jon A. · Answer

Personally, I NEVER buy down my rate or willingly pay points. When you do this, you're giving the bank interest up front. The bank loves this bc, when you refinance in a few years, they keep your money.

People often assume they're going to keep a mortgage for 30 yrs. Few people do, and that number is even lower for people who view real estate as a business endeavor.

My opinion - take whatever rate you can get without points. Make sure the deal works at that rate. Refinance for a lower rate down the road.

Caroline Gerardo · Answer

Refundable buy down is smoke. Many mortgage companies closed their doors in 2022. You have no idea what they will offer in the future. Refundable buydown is a poor choice. If the lender allows you to take cash (which I wonder and doubt) take it or use it to pay and refund anything you paid.

Jamie Warcken · Answer

@Kevin Sobilo, @Caroline Gerardo, @Daniel Johnson Sorry, I should've mentioned the buy down is refundable, so when it's time we can use whatever buy down cash is left to pay for the refinance. I had never heard of that, but we've never bought a house with rates this high. We have our own cash in reserves, and are putting 3.5% down specifically so we can use our reserves to improve the property. Does a refundable buy down change anything, or should we still take the cash at close? Thank you so much for your replies!

Buy down our rate, or take home extra cash at closing?

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