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C, Home Buyer in Maryland

how far down can a mortgage interest rate be bought - is there a maximum? particularly on a FHA or VA loan?

Asked by C, Maryland Sat Jun 14, 2008

We are looking to buy and would like to have a mortgage rate buydown paid for by the seller as part of closing costs - we feel this would give us good negoiating power instead of just lowballing on the price. I'm wondering if there is a maximum that you can actually buy down the rate (2%, 3%, none - whatever they are willing to pay?). Particularly for a VA loan - as my husband is a vet and we will most likely use this to get a mortgage. Any advice is appreciated - thank you!

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Most banks have programs that will allow you to buy points off your interest rate. Most of the time is up to 3%
However. . you should be completely sure that this money is well spent. . if you are going to stay in a house for only five years. . spending 3 points (3% of your loan amount) to reduce your payments just a few dollars every month isn't a good investment if you are not staying there for a long period of time.
Make the calculation and decide from there when is your BREAL EVEN DATE
You may be better off to ask the seller in reducing the selling price.
2 votes Thank Flag Link Wed Oct 15, 2008
a 30 year fixed FHA rate is currently about 6.5% for 0 total points. To give you some perspective, if you paid 3 points your rate would be 5.75%. in this case you buy down your rate .25% for every point you are willing to pay. You should have a Loan Officer work it up for you first so you can see how much is left over after you have the Seller pay your closing costs and prepaid taxes, insurance and interest. FHA will allow you 6%. There's a way you can get an additional 3% from the seller which can also go towards your down payment so you truly come up with NO money at closing.
1 vote Thank Flag Link Tue Jun 17, 2008
It depends to the lender, and the loan program. There is no norm, however most lenders allow 3%, and I have witnessed up to 6%.

VA specialist most likely can assist you on this! Keep in-mind, VA loan would be stricter on buy downs, and sellers contribution! Please check with your VA Lender first!

Cheers,
0 votes Thank Flag Link Tue Jun 17, 2008
C,

Yes there is a maximum that you can buy the interest rate down. But please understand that just becasue the seller is giving you 1-3% it does NOT mean your interest rate will be bought down 1-3%. Lenders work in bps. So it may cost you 3% to buy it down a .5% or even .375% every lender is different. What you can buy the rate down depends on where the current rates are and some lenders will not do off sheet pricing.

If you have the option of doing a VA loan of FHA loan I would definately go VA. Rates are lower and their is no mortgage insurance to pay just a 1 time fee so that will also make your payment lower plus you can borrow 100% of the purchase price plus the closing costs if the seller is willing plus your 1 time fee. FHA you will HAVE to put money down and allows 6% sellers assist.

And as far as using it to buy the rate down or for closing this this will depend on how long you plan on staying inthe house. There have been time where the rate buy down has saved my clients 1000's and other times didn't really make a big difference. If I can be of further assistance please let me know I would be happy to help you 1-800-839-6186x334
0 votes Thank Flag Link Sun Jun 15, 2008
Contact your lender and he/she will tell you the maximum. I believe the maximum seller credit for an FHA loan is 6% right now. This is very high -- most loans allow a maximum of only 3%.

Keep in mind that for the seller, a credit costs him money just like a reduction in price. In fact, it may cost him more since his sales commission may be based on the final sales price *before* the seller credit. So, an offer 6% below asking price is the same to the seller as a full price offer with 6% closing help.

Also, I agree with Frank's answer below. Having the seller pickup your closing costs puts real money in your pocket. You may not get a good return from buying down your interest rate. Do the math -- for every point you pay, how much is your monthly payment reduced? For most buyers, your better served by negotiating a lower purchase price -- keep it simple.

Good luck.
0 votes Thank Flag Link Sun Jun 15, 2008
The lender that are using will tell you the limit based on their underwriting standards.
I would use the money towards closing costs first, then the loan second. Until rates get up to the 7% range, it's best to use that money for other things before a loan buydown.
0 votes Thank Flag Link Sat Jun 14, 2008
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