Is it better to buy down an mortgage rate? For example, should I purchase a 5 percent interest rate on a $685K 30 year loan at a cost of half a point or is 4.875 interest rate for 30 years at 1.5 points better?
3 Answers from Attorneys
That's not a legal question.
Buying down a mortgage rate is a number-crunching exercise. In your matter, a $685,000, 30 year fixed loan, at 5%, would have a monthly payment of $3677.23. At 4.875%, the monthly payment would be $3,625.08. You indicated that the lower rate loan will cost you 1 point extra, or $6,850.
Inasmuch as your monthly payments can be about $52 lower, you will save about $624 per years. Put another way, you will recover your $6,850 fee in about 11 years. The real question for you to answer is what would you do with the extra $624 per year, if you had it in your pocket? Would you put it into an investment that pays a high return? If so, you would want to keep it by paying down the loan. If that $624 would just go toward Starbucks Lattes, it might be better to make your mortgage smaller from the beginning, by paying down the rate.
The bottom line is your call, but remember one important thing - Everything is negotiable, including the rate for buying down a mortgage. If you are getting a 5% fixed loan (or better), you have probably earned an excellent credit history and you can justify an excellent income. You are GOLD to the lender. Why not offer to buy down the loan for 1 point, instead of 1.5? In fact, if you have time, you can make a lower buy-down offer, and, if it is rejected, tell the lender to wait for your decision, while you check with other lenders. I'll bet you get some action.
It's a personal finance matter, in part depending upon how long you intend to stay in the house and/or how long before you refinance. Lower interest rates at an up-front cost are relatively more attractive if you plan to stay in the property for a long time, and relatively less attractive if you are likely to sell or refinance before long. There are also some tax consequences and some issues related to your expectations for future inflation. Home mortgage interest is tax deductible, lowering your effective after-tax cost of being a borrower. High future inflation would tend to favor being a borrower as well.