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Should I buy points to lower my interest rate?

By Milo

January 19, 2024 6 min read

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Should I buy points to lower my interest rate?

In the current real estate market, characterized by fluctuating interest rates and a competitive housing landscape, rate buydowns are emerging as a strategic tool for property investors. A rate buydown allows borrowers to secure a lower interest rate on their mortgage, often critical in a market where even a small percentage difference can significantly impact monthly payments. This tool is becoming increasingly appealing, particularly for international investors looking at the U.S. real estate market as a potential opportunity for stable and profitable investments.

Understanding how Rate Buydowns work

Rate buydowns can be categorized into two main types: temporary and permanent.

Temporary Buydowns: These involve a lower interest rate for a specific initial period (1-3 years) which then increases to the market rate. For example, a 2-1 buydown might start with an interest rate that is 2% lower in the first year and 1% lower in the second year before reverting to the standard rate.

Permanent Buydowns: In contrast, a permanent buydown reduces the interest rate for the entire duration of the loan. This is achieved by paying mortgage points at closing, with each point typically equivalent to 1% of the loan amount and reducing the interest rate by approximately 0.25%.

Pros and cons of Rate Buydown programs

Pros and cons of rate buydown programs

When does a Rate Buydown make sense?

Consider a scenario where the property price is $600,000 with a loan amount of $390,000. Without a buydown, the interest rate might be 8.25%, leading to a monthly payment of $2,930. By purchasing one discount point (costing $3,900), the rate drops to 7.875%, and the payment decreases to $2,828, saving $102 monthly. The breakeven point (the time to recover the upfront cost) is calculated as $3,900 / $102 = 38 months. Post this period, the savings per month start accruing.

Calculating rate buydown for mortgage

After 38 months: With the buydown, you save $102 per month compared to the scenario without discount points.

A rate buydown is particularly beneficial under two circumstances:

  • When lower monthly payments are crucial for ensuring rental income covers mortgage costs, aiding in positive cash flow.
  • For investors intending to hold the property for more than three years, allowing them to recoup the upfront costs and then benefit from reduced payments.

Factors to consider for International Investors

International investors should consider the following:

  • Educate yourself on the dynamics of the U.S. real estate market and interest rates.
  • Align the rate buydown decision with their long-term investment strategies and goals.
  • Understand local market conditions and the potential for rental income.

Conclusion Rate buydowns offer a significant opportunity for managing mortgage costs in the U.S. real estate market. International investors considering this option should carefully weigh the benefits against their investment timelines and financial strategies, ensuring that their decision aligns with their long-term goals.

Interested in a rate buydown? Schedule an appointment for an in-depth consultation.

The opinions expressed in the Blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product.

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