Financing in San Antonio>Question Details

Rob, Home Buyer in San Antonio, TX

Do lenders still allow buying down an interest rate and does it make economic sense to do so?

Asked by Rob, San Antonio, TX Tue Jul 6, 2010

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Hello Rob,

I am a mortgage broker and a Realtor in the Austin area. When considering whether to buy to buy down the rate with discount you do want to look at the cost vs. how long it will take you to recoup those costs.

Most of my clients do not choose to use discount. It could make sense if a lower rate can be had for a small amount but in most cases it does not make sense. The vase majority of my clients today are going with a credit and choosing a slightly higher interest rate.

For example. As of Today a 30 year rate is 4.25% with zero points. Many of my clients are deciding to go with a 4.375% or 4.5% rate because I can give them a credit to reduce their closing costs. When deciding the best way to go you need to look at how long you project to be in the home and how long it will take you to break even.

For example. Let's say you decide to go with a rate of 4.375% and that payment is $12 higher per month but you are getting a credit of $1500 towards your closing costs. So if we divide $12 by the $1500 you are receiving it will take you 125 months or over 10 years to break even and come out ahead not taking the credit.

That is just one example but it is important to know and understand the relationship of the rate that you choose and the credit that you receive. I charge my clients a flat fee of $1495 on loans up to $299,000 and $1995 on loans up to the jumbo limit of $417,000. This means that you receive 100$% of any rate credits and eliminates my clients wondering how much I am making on the loan. I lend throughout Texas and for my local Austin area clients where I represent them as their Realtor I do their loan for a flat fee of $495 regardless of loan size.

I hope that explains you options. Please feel free to give me a call to discuss further or if you are working with a lender already make sure they take the time to explain all the different options you have so you can decide which one is best for you.

Good luck on your home purchase.
1 vote Thank Flag Link Wed Jul 7, 2010
Most of the answers are the same and basically correct. I quote both options for clients and urge you to contact some local lenders and do the same thing. It really depends on how much it will cost you but the real factor for me is how long do YOU think you will live in the home? I mean even if it's say 10 years but the rate is 4% and you know that you will live there for 20 years then it could make sense. We just bought a home this year love it and hope we are there for the next 25 years. It really depends on your scenario but a good loan officer will ask the types of questions that we all posed here to you. Good luck and hope it helps.
0 votes Thank Flag Link Thu Jul 8, 2010
Hi Rob,
As you can see from the other answers Lenders do allow rate buy downs. Each Lender has different rate sheets so it will depend on that specific lender as to how much you can buy down. You will need to calculate the cost of the buy down vs the time you plan on spending in the home to make sure it makes sense.

If your purchasing a home I would suggest having the Seller pay for your rate buy down. This will give you three times the monetary benefit vs having them just pay the traditional closing costs.
Best regards,
0 votes Thank Flag Link Thu Jul 8, 2010
Hi Rob:

Yes they do.

Regarding making business sense it comes down to the term of the loan, 3 yrs / 7 yrs / 30 yrs.

If say the Europe crisis continues, or say economy heads to a double dip then we are looking at
continued lower rates, and possible more softness.

So buying down may not make sense.

Best regards
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0 votes Thank Flag Link Wed Jul 7, 2010
Rob: It depends on how much it will affect your payment and if it is worth it to YOU to have a lower payment. Sit down with your lender and get all of the interest rate and payment scenarios so you can make an educated opinion based on where you want your payment to be and how much you will have to pay to buy the rate down.

Many of my clients like to buy down their rates because they want their payment to be as low as possible.
Web Reference:
0 votes Thank Flag Link Tue Jul 6, 2010
You might find it hard to find a lender to allow this right now in this volatile mkt.
Buying the rate down makes sense only if you stay in the loan long enough.Move earlier than your 'break even' point and it isn't a good deal.

Now, I just peeked at a rate sheet and if you bought down the rate today, you would go to 'off sheet pricing' that the lender might have a hard time selling.
0 votes Thank Flag Link Tue Jul 6, 2010

Yes lenders do still allow for interest rate buy downs. Economic sense? I would suggest you talk to a lender and your accountant for that info. Rates are low and spending extra money up front for a temporary reduction in payments doesn't seem too beneficial, although it would really depend on your financial situation and needs.

Hope that helps!

Matt Stigliano, Realtor®
RE/MAX Access
(210) 646-HOME
"Your all access pass to San Antonio real estate."
0 votes Thank Flag Link Tue Jul 6, 2010
Its definitely a great option to explore especially if you're getting a seller credit towards closing costs. It also depends on your plans in terms of how long you will live in the home.
0 votes Thank Flag Link Tue Jul 6, 2010

Yes, lenders allow buying down interest rates.. as well as the opposite - Premium Pricing - where you take a higher rate to make your closing costs lower.
Effectively, banks will get their money one way or the other - up front, or monthly. It is up to you how as to what makes sense. I highly recommend you get a quote of the rate at "zero" (no points) and then ask how much it will cost you to get a better rate.. a good lender will give you several options. Then, it is simply up to you to calculate how long you plan on having that loan and what the difference in payments will be.. so, if it will save you 30/month, but cost you 3000, then that is 100 months to break even... don't do it unless you will be there longer than that...
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0 votes Thank Flag Link Tue Jul 6, 2010
Yes, you can pay what are called points to get a lower rate, but it may or may not make sense depending on your situation.

Most of the time paying zero points is the way to go.

It depends on how much you are borrowing,if the seller will pay points and many other factors.

Get a good mortgage person to pre approve you and they will walk you through the process.
Web Reference:
0 votes Thank Flag Link Tue Jul 6, 2010
Yes, but with rates at historic lows I don't see how it makes sense right now. Buying the rate down is nothing more than prepaying the interest and adds to your closing costs. Just my .02 cents
0 votes Thank Flag Link Tue Jul 6, 2010
Yes, you can still buy down an interest rate. If having a lower monthly payment is important, then yes, it makes sense for you if you have the money up-front now.

Justin Werner, ABR, CDPE
Accredited Buyer Representative
Certified Distressed Property Expert
RE/MAX Exclusive
0 votes Thank Flag Link Tue Jul 6, 2010
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