Financing in El Monte>Question Details

Doug, Home Buyer in 91731

Which is better? lower the rate by pay fee and point or higher rate but no point and fee.

Asked by Doug, 91731 Sun Sep 12, 2010

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Very good question, Doug.

It really comes down to how long you plan to keep the property you are buying. Simply put, find the difference between your two payments to determine your savings by buying down the rate, then divide your monthly savings by what it costs you to get the the lower rate.

"pay fee and point" / monthly savings = total months to break even.

If you plan on keeping the property for more than the number of months it takes you to break even on your Rate Buy Down investment (without refinancing or paying off the mortgage) then you could consider it good decision to buy down the rate. An item of note, consider carefully if you have a long term break even point like 10 years & you plan on staying there for 15 years, for example.

Hope that helps,

Roswell Moore, CMPS
DIRECT 480 422 5095
NMLS ID 263779 | AZ BK 0903725
Web Reference:
3 votes Thank Flag Link Mon Sep 13, 2010
Hi, Doug

Given the fact we're still in a declining market, which means the home you buy today will be worth significantly less with 1-6 months of you pruchasing it, its wiser to put as little as possible into a purchase transaction. You'll earn a greater return over time keeping the difference in a mutual fund or even municipal bonds! Also, given how historical low rates are right now, for a FHA loan even people with marginal credit are getting 5% worse case with most if not all their closing costs paid for! And just so you know, at a 100,000 loan amount, the monthly moprtgage difference between a 4.5% and 5% rate is about 38.00. However, the cost to by down from a 5% to 4.5% rate could cost you an additional 1,000.00 Factor that on top of your home losing anywhere from 5,000-20,000 within the first 30 days after you close, the choice is simple.
1 vote Thank Flag Link Mon Sep 13, 2010
Hi Doug,

It really depends on how long you are planning to stay in your home and keep the same loan - you really need to work the numbers for your particular situation to see which would be better for you. If you are only planning on keeping the loan for the short term, you might be better off with a higher interest rate and higher monthly payments, as you still could save money in the long run over paying a point to the lender up front. On the other hand, if you were going to keep the same loan for a long period of time, it may be less expensive for you in the long run to pay the point now and get the lower rate. Look at the amortization schedules of each option which may help you decide - your lender should be able to provide those to you. Good luck with your purchase!

John Barry
DRE #01856079
Coldwell Banker Residential Brokerage
Cell: 323-810-7976
Twitter: @RealtorJB
1 vote Thank Flag Link Sun Sep 12, 2010
Hi Doug, as others have said, this decision depends on the cost to buy down the rate and how long you plan to stay in the property. To calculate your "breakeven date”:

1) Calculate the monthly payment WITHOUT paying down your rate,
2) Calculate the monthly payment WITH paying down your rate,
3) Take result from #1 and minus result from #2 (this is your savings per month by paying down your rate).
4) Now, take the total cost of paying down your rate and divide by the result from #3 (this is your breakeven point in months time).

Now you can consider the cost vs. benefit based on the number of months/years you intend to stay. For every month you stay past the breakeven point you are saving money. Leave before the breakeven point, and you have lost money by paying down your rate.

As Rudy points out below, keeping your cash is a smart play in these uncertain economic times for security and financial return reasons. One simple fact to remember is that every dollar you pay in principal returns 0%! Additionally, we are all aware of the mass amount of stimulus money that has and is being injected into the economy. At some point, the economy will recover and we will enter an inflationary period. When this happens it is quite possible that the note rate on your loan will be lower than your Bank’s standard savings rate!

Best, Steve
0 votes Thank Flag Link Mon Sep 13, 2010
In addition to how long you plan to stay in the home, it may be a factor of current cash flow too. Some of my buyers dont feel comfortable putting all their cash into a deal. They have been saving up to buy a house and can finally do it, but don't have a lot of left over emergency money. So even though in the long run it would be beneficial, they are using short term personal judgement to keep an extra cushion on hand if needed.

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0 votes Thank Flag Link Mon Sep 13, 2010
Good answers below. The longer you plan to live in the house, the more sense it makes to get the rate down. If you are thinking short term, keep your funds available for other things or start with a lower balance.
0 votes Thank Flag Link Mon Sep 13, 2010
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