My parents HOUNDED me to refinance when rates were at their lowest. Very glad I listened. I went from 4.875 to 2.99%. The lower rate will save you so much money.
Instead of having the buyer pay for the interest rate buy down, with this increasingly slowing housing market, a savvy realtor with strong negotiation skills could negotiate a sellers credit where the credit could go towards buying down the rate.
But if you skipped the buy down and put that $5000 in mutual funds that averaged 8% over 30 years, it would become more than $54,000. The likelihood of someone keeping a mortgage for 30 years without refinancing when interest rates dropped seems small. Alternatively, the difference in mortgage pymt between a 6% and 5.75% rate is about $75.89. If you paid the $5000 buy down and invested your $75.89 every month for 30 years, at an 8% average return, you'd have over $113,000. So I guess it depends on how disciplined someone is and how long they keep that mortgage before recouping the $5000.
Buy down doesn’t make sense if you put 10% down. It would be better to put that towards your down payment and make extra payments to the principal. Plus, you can always refinance, in which case you don’t benefit from the buy down at all.
Really great explanation Javier. Easy to understand. Note: You are losing a small amount on your mortgage interest deduction when your interest payment is less. It's probably inconsequential relative to what you save, but still worth putting into the calculation based on your tax bracket.
Great video. One point to note, ensure homebuyers know on your Buydown Calculator that the maximum amount of buyer paid fees + points is 3% per federal law. So showing a 3% example, doesn't leave room for other related lender fees. If the sellers provide a seller concession (up to 3% or 6% of loan, depending upon loan type) those can be applied to discount points, fees, or even a 2/1 or 3/1 buydown to lower the payment until the rates come back down in the next year or so. Keep up the good work.
When I bought my house last year, the interest rates were around 2.5% +/-. I bought my interest rate down 4.5 points to 1.375%. Although the 2.5% was a good interest rate, the area I was buying in has higher taxes plus I bought I'm an HOA community, so I wanted to get my monthly payment as low as comfortably possible and buying down my interest rate to afford more house was what I did.
@@MsFox2u it’s probably more expensive now to buy down points because of the rising rates :( . We are getting a new build but these rates are scary. Glad you got your house when you did.
But then again, every time there’s a dip, like the one we just had, that’s when you want to refinance at 3% or lower. So keep your 10k don’t give to the bank, pay more into your mortgage per month as you can, say extra $100 - $500 per month and wait for the dip. Downturns come every 10 - 13 years.
To ‘buy down’ your interest rate, look for ways to reduce the amount of interest you pay. This could include talking to your lender about interest rate reductions, shifting higher-interest debt to lower-interest loans, or consolidating multiple accounts. Doing so can help you save on overall interest payments and work towards your financial goals faster!
It will be interesting if you can invite a lender to explain why some do not agree with this. I was reading some of the comments and some agree that it would be best if you put the money towards the principle… Would love to hear an expert speak on this.
I so agree with you on this. It would be better to have a lender on to explain why this actually does not work out the way people think it does. The average time somebody keeps the mortgage is actually seven years. Buying points rarely if ever mathematically sense.
I did a 2pt buydown that dropped my monthly mortgage payment down $1500. Still it is better to have a 780 or better credit score across the board, do a 20% down, get as many concessions from the seller and then finally see what the interest buydown is to see if it makes sense or not.
If you have solid credit and a decent job, check your local credit union as they will most likely have the best rates. Look around at your choices and join the one with the best rates to establish a relationship with them. As of today, July 2, 2022, my credit union is 4.75% conforming or jumbo on 30 year fixed.
One important point I’d like to add is that you should check the interest savings against the scenario if you were to invest the cost of the rate buy down. You could take the $5k or $10k and invest in the market and earn a 7% return or some. If you consider that, then it does diminish the savings because you’re adding in the opportunity cost of using that money elsewhere.
It's really all about luck and timing. Let's say 2 years ago when rates were around 2.75-3.00% for a 30 and someone, instead of using their $10-15k to buy down a rate to a guaranteed ~2.25, decided to invest in the monies in the hot ETF-of-the-day ARKK. Right now their investment would likely either be flat or down.
@@WilChu this was me, well I wasn’t buying a house but I was all in the ARK ETFs and some other hit stocks and have lost money overall. At my peak I was double my investment. I was tempted to invest a large portion to save for a house faster and am glad I didn’t or else I wouldn’t have 20% down for the house I just bought.
Thanks for great info Javier but there may be some missing topics and I'm not sure if I'm right or wrong. I heard from others that 2-1 buy down is only temporary and after 2 years it will come back again to original mortgage interest rates not unless if homeowner refinance. Second, I'm a Realtor who helped a buyer this year who didn't pay for her discount points. Why? I negotiated with the seller to pay it during closing. So yes! Buyers need an experienced Realtor to help them save money.
Hey javi, I appreciate you making this video, however I disagree with your conclusion for 2 reasons: 1) the likelihood of someone owning the property for 30 years is extremely slim. Even if they did keep it for 30 years, thanks to inflation, this debt in theory will be easier to pay because they will likely also make more money, so the interest savings over 30 years shouldn’t be a main motivator for the rate but down. 2) more importantly, rates are not going to stay this high forever. I think it would be better to not spend money on points now, and then use the money you were considering using to buy points to refinance in the future (maybe 3-5 years from now) to something much lower.
I was thinking the same thing. We just bought a house and our lender told us our interest rate on our loan is not forever. We can refinance as soon as interest drops.
interesting. I think my only counterpoint is that most peoples income almost never rises at the same rate as inflation. at least since the 60s-70s to my knowledge.
@@Monicamcs the main point here is if interest didnt come down till the Break Even months. means if buying 2 points and differnce in payment will catch up in say 24 months and for that 2 years the interest didnt comedown . then the concept worked. since you cannot refinance. but if it comes down like the vender said then buying point is a loss.
It also depends, on the market where you live; the down payment may sway the seller towards you. Buying down points is a lot of money if you intend to keep the home for 30 years. 1 point is approximately 1% of the value of the home, paid upfront, that may save you tens of thousands of dollars throughout the lifetime of the home loan. This is a strategy that I'm thinking of using, because many more buyers are on the sideline now, compared to a few months ago, and I may get an offer accepted.
So, what happened when you spend the money to buy-down and the. 6-months later; the interest goes down and you could still refinance to the buy-down interest rate? Wouldn’t you waste that buy-down money??
How much does this matter when the average homeowner sells 5-7 years after buying….then if you account for inflation, the interest savings after 30 years isn’t as substantial. The $70k in savings 30 years is in todays dollars and will equal about $34k in 2052.
Haga videos en español hermano, hay muchos interesados que no dominamos al 100% el ingles y muchas veces las terminologías nos confunden. Está muy muy bueno tu canal!!
Hi Javier, thanks so much for the info. Does it make sense to put more down payment than buying points? Esp to get rid of the PMI. Does higher down gives you an advantage? Thanks :)
It’s not a question of if you are staying in the home for seven years. It’s actually a question if you were staying in the mortgage for seven years. Fortunately for CTS2NV, do you like they are going to get to float down or change to another lender within the next 270 days because rates will likely be lower. But the question people should ask themselves is not whether they plan to stay in the house for seven years it is actually what they believe that interest rates will drop and give them an opportunity to refi Within the next 2 to 4 years…… I believe the answer to that question is yes.
It’s not a question of if you are staying in the home for seven years. It’s actually a question if you were staying in the mortgage for seven years. Fortunately for CTS2NV, do you like they are going to get to float down or change to another lender within the next 270 days because rates will likely be lower. But the question people should ask themselves is not whether they plan to stay in the house for seven years it is actually what they believe that interest rates will drop and give them an opportunity to refi
I’m thankful I bought my Condo in 2020 and got 3.125 apr. My mortgage is 564.00. Including escrow for taxes and insurance. Rates are 6.6 now! More than double.
I got my interest rate bought down from 5.75 to 4.75. Seller got smacked over the head by the inspection report, and we damn near got max concessions. That was used to buy it down.
This good info. Thanks for explaining. People just need to remember refinancing their property is the same as selling your home… so keep this in mind when considering whether to buy down rates.
I am a lender. 90% of the time it doesn't make financial sense to buy down rate. In todays market I think it's an even worse decision to buy rate down. Reason why. We are heading into a recession. Meaning rates will naturally drop in the near future. Spending 10k right now to save .75% interest rate isn't good value. If you just got a mortgage at 6%. Wait a year or two. When rates go back down past 5%. Refi. Cost 4k, not 10k. And youll have a better rate to boot.
Also makes little sense to do lender paid for brwrs as well with rates inevitably coming down then the lender having to pay an EPO fee. Borrowers want immediate savings and if it's at your expense they'll do what's best for them. You can't blame them.
Wait, Javier, aren't buy downs only temporary? Like a lower interest rate for only the first 2 years or so? Or are there permanent rate buy downs? Is it all just lender dependent?
They are TEMPORARY. It's only to help until the interest rates "hopefully" go down. If the Buyer can't afford the home at the given interest rate, they should not be purchasing the home on the hopes that the market will turn around in max. 3 years.
@@sandersshameka31 Relax 😌 Using buy downs isn't just for people who "can't afford" something. You may get additional seller's concessions and need to apply it towards closing costs... there are different places to apply the funds, and buy downs are one option.
10k to lower interest by buying points saves you a lot more than 10k additional in down payment. Assuming you are putting 20% or less down. Not sure about 20% plus
Just do what I did and model all scenarios before you do it. I’m paying off my mortgage early (within 10 years) and buying down was only 1400 and I save myself a few thousand over 10 years by buying down a little. It’s not much but it was worth it for me.
I have been waiting for this video: It’s simple and straight to the point 11 mins of Gold I will easily pay 10K to Save 70K 🤓🖤🏡📶💰 “Thank You Javier” I think this the Best Video in the last 3 Months!!!
What about keeping the free interest price, and paying a bit more month to month and having that $10k in your savings in case things go south. (Treat it like the house savings, not with your personal savings.) would it come out the same long term?
An additional $10,000 would lead to paying $33,000 less in interest over 30 years on a 5% mortgage. This would also be equivalent to buying down your interest rate from 5% to 4.625%.
Have a mortgage lender put together a Total Cost Analysis for you to review the options - more down vs. less down, buying down the interest rate versus not buying it down etc. @thatmortgagecouple if you ever need help. Thanks
Just watched this buy down video, very good however I'm a bit confused. My lender said they too offer a buy down but it doesn't cover the whole 30 year mortgage. He said I can buy it down for two years? Each year it goes up a percentage point until it's back to the current rate? Who would bother with that??
Thanks, I understood everything except breakeven. Could you explain the breakeven thing. The years it takes to break even 5k or 10k that u were showing.
Keeping the same strategy in mind of long term thinking. I’m perfectly fine if my equity is negative. Did I over pay? Sadly yes. My interest rate is 3.25 and mortgage is super affordable but I’m screwed if prices tank and I need to sell. I think my only logical option at that point will be to rent my house out.
Your doing good bro and have a good plan. What if there is a correction and prices climb after that? The waiters are probably still going to wait like they did from 2020 on. I know a guy who chose to wait for a crash and is still waiting. Now he's desperate and looking at middle of nowhere places. That's all he can afford now.
I wonder if it would be worth buying points if i have half of the cost of the house cost saved already and the other half will only take 3-4 years..i would guess probally not. I worried if the bank finds out this they won't want to do the paperwork or loan knowing i'll pay it off in a couple years like my truck 🤣
Say 10k gets ya 5% back per year. In 5 years it’ll be $12500. Good chance rates will on the downswing if companies are offering buy downs. Take that and refinance to probably lower than the buy down.
I'm just curious in the difference between the lifetime interest you would pay if you just add 10k to the down payment, keeping the free interest rate, and if you buy down .75% interest with the 10k. id like to see that math.
not to mention, interest rates change constantly. youre paying 10k for .75% discount when in 4 years (hopefully) the rate may be a full point or more lower. 10k or less to refinance to the new rate. I guess you gotta hope the actual interest rate doesn't dip lower than your discounted rate before you make the money back through monthly payments if you choose to buy down.
I just got off the phone with a lender. I wanted to buy every point allowed and she kept trying to talk me out of it. Break even would be 7 years. I planned to stay there until my 4 kids are out of school, at least 15 years.
Don’t get sucked in by Lennar. They need to reduce the price by $50k-$100k. They kept sending me email. I told them don’t email until they reduce the price by $100k.
you're gonna get punished . Stay away from such short term. Maybe 7 or 10 minimum. Too scary or just stick with a 30 year buy points if it makes sense. let the numbers talk along with the risk taken
There's two 'ifs' in your theory: 1. If we hit a recession and 2. If due to the recession unemployment goes up. One thing I can say with certainty: I dollar today is worth more than a dollar tomorrow. For this reason, a principal payment makes more sense to me the majority of the time. However, either option is better than holding on to the cash
3 total percent or points (loan costs and discount points) are the maximum amount if paid by a buyer. However, a seller can provide between 3 and 6% depending upon loan type. To maximize the benefit, have the seller provide the most seller concession you can get, then apply that to discount points, adding your own depending if the math makes sense. Then hold your cash to refinance down the road when rates drop. I hope that helps -
If you invested the $5000 for 30 years you’d have around $35000 (assuming 7% year over year). Is buying down points really worth it after you factor in the time value of money?
Depends on what you do with the savings. If $5,000 saves you $75/month and you invest that $75/month into the same market, you’d have $85,000 after 30 years.
Rate of return for investments vs. discount points isn't a common consideration. We look at buying down points based upon two things - How long you plan on being in the home? Hence the break even period on if buying down makes sense. How comfortable you are with the payment and the amount of cash you have after the closing. You'd want to ensure your payment fits your overall budget/lifestyle and that you have enough cash left over after the purchase to cover for unforeseen events. We'd recommend 3-6 months worth of living expenses at least in saving after your purchase. The more common question on rate of return vs. investments is down payment - putting less or more down to improve the interest rate etc.
What if your not going to sell the house but you want to refinance if these crazy rates ever drop back down is it still worth it to buy it down even if you are hoping to refinance?
By this logic, you could invest the $188/month you saved on the monthly payment by buying down the rate. After 30 years and 7% average annual return, you would have $229,355.
Some people are betting rates will come down before the 4.2 year breakeven point. They are planning on refinancing before 4.2 years. No one has a crystal ball, and no one has one single answer to this question.,
Does the lender determine how large the down payment has to be before the discount points can start to be applied?? I’m a little confused in regards to that because the down payment would be different per person, so if someone low balled their down payment does that mean they could save up the same amount they were originally planning and get the discount points applied??
Checking if buying a point makes sense 1. Calculate the monthly amount for the interest rate at 0 points(A) 2. Calculate the monthly amount for the interest rate at x points (B) 3. Calculate the difference between the two monthly amounts (A-B) 4. Calculate the Payment for buying the point (loan amount * x/100) say Z (check for other costs such as underwriting fee, processing fee, loan origination fee, etc.) 5. Divide payment by the difference divided by 12: (Z/(A-B)/12) The answer is the number of years it will take to gain that point back. If the answer is less than the years you plan to stay in the house, go ahead and buy it. Else, don’t
I would never put that much money down up front for only .25%. I rather recast each year and wait a couple of year for rates to fall and refi at half that interest then continue to recast. I would rather throw that 5k into mutual or index funds. 10% in gains is far better then saving .25%.
Well, it's 2022 and interest rates are at 15 year highs of 6-7%. I personally dont believe buying down the interest rate is worth the cash, as at this point, ANYONE who buys a house right now WILL ABSOLUTELY NEED TO refinance once rates come down from these highs. So there's no point in throwing away 5-10k trying to lower your rate NOW when you WILL refinance in 2-3 years.
I'm currently buying a house the lender said if want to pay down the rate at first my husband and I were going to, but then we figured what if rates drop next year and we refinance then we loose out of 5,000 to buy down. So idk if we should buy or wait?
@@averageinvestor4986 that's how we are too. I saw they they expect them to drop in the end of 2023, and if we buy down point it'll take about 3 years to recoup it. So it's just confusing because you hear so many different things.
I'm facing a similar conundrum, debating whether to wait on buying. The Fed has signaled that they're going to keep raising interest rates to combat inflation... & it's not going to work since our current inflation is supply side & gouging related (raising interest rates targets demand related inflation)... So it's likely they're going to keep raising the rates in a vicious cycle for awhile. Point is, the interest rates are going to come down eventually, but doubt it's going to be as soon as next year. If anything, next year's rates are likely to be higher. BUT what will probably be a lot lower is the cost of the homes, since we're heading into recession (maybe even stagflation woo so fun 🥳). The way I figure it, if I buy now I should pay down the interest rate as much as possible, especially considering the value of the home is probably going to drop... Or I can continue to save and wait to buy when home when prices are better in a year. I think I'm going to wait, but that's because I don't intend to buy in a crazy tight house market where investment buyers will keep the home prices somewhat inflated even in recession.
I just bought with Downpayment assistance @5% and wasn’t able to buy down. I received $30k from CalFHA that will be forgiven in 5 years and can’t refinance for possibly 5 yrs I say possibly because I know ppl who were able to even though they too were told they couldn’t. I degree I still have my $40k in the bank. 🎉 Should I pay down the principal? Or wait until I refinance (if I can….later) then buy down. 🤔
With a 5% rate I wouldn't pay down the principal. The average return in a normal stock market is ~6%. If you invest the $40K you'll earn more in the long run, especially considering the 5% interest rate is also tax deductible, so your real rate is less. Also down payment assistance programs you aren't typically able to buy down interest rates, as they are set by the assistance program themselves.
I'm glad I took another step in getting a new home. I bought my second expensive house last two weeks paid in cash, I feel so happy for myself and my achievements watching this random video. So glad I made a good decision about my finance that changed me forever. Thinking of building a barndominium. just hope it encourages someone that it doesn't matter if you doesn't matter if you don't have any of them right now, you can start TODAY regardless your age INVEST and change your future! investing is a grand choice I made! great video! thanks for sharing! I love this.
Cool chart and it helped. I’m about to get fucked buying a house. Question. What if house purchase price is 350. I get a loan for 325k I put 25 down whatever/ What if in 3 years I have 300k to pay off my loan? Do I still have to pay the bank interest?
Absolutely. Your loan size is smaller and your monthly payment goes down. (Forever) All the lender does is front load the interest you would have paid had you not bought down the rate, they are taking a gamble on that breakeven to win because historically most people don't keep the loan long enough for it to be worth it.
Lowering the loan amount by $10K won't have a big impact on your payment or your total interest. I would be better to consider having the seller provide seller concessions (in this market especially), and use those to do a 2/1 or 3/1 buy down. that lowers your rate for 2 or 3 years, then look at refinancing as rates drop in the coming couple of years. Keep your $10K for the refinance or for reserves should something happen down the road.
Hello there. A 5 year mortgage doesn't exist. Mortgage terms are 30, 20, 15, and 10 yr. There are a few off companies out there that vary slightly but what you'll find is anything off the standard terms of 30 and 15, the rates will typically be higher or the same. The reason for that is rather complicated, so we'll skip that part. However, I think what you mean is more you plan on being in a home for 5 years and want to know the interest rate - if so that really depends upon how much your putting down, your credit, and the loan program, not to mention as Javier indicated - you might buy down the interest rate in a few different ways. So I'd encourage you to contact a lender (we're one if you'd like) and get the specific rate for your particular circumstances @thatmortgagecouple
Instead of putting a band aid on the slowing housing market, how about we (buyers) wait until the housing market actually corrects itself to buy again? Houses are still 40% - 50% overvalued. If we keep buying houses the prices will never come down. Don't buy down your rate, wait.
My parents HOUNDED me to refinance when rates were at their lowest. Very glad I listened. I went from 4.875 to 2.99%. The lower rate will save you so much money.
Great parents.
Buy them something nice for holidays/birthdays this year
What awesome parents!! Glad you listened bc you know how kids don’t listen to their parents sometimes 😂
🧢
I’d kill for the 4.8 rn… they got me at 8.75%
@@mattsavage1951damnnn how so high? & when did u buy?
Instead of having the buyer pay for the interest rate buy down, with this increasingly slowing housing market, a savvy realtor with strong negotiation skills could negotiate a sellers credit where the credit could go towards buying down the rate.
Insert yours truly
Or closing costs
It rhymes with that Usher song concessions
What tactics or leverage can you say to negotiate a sellers credit?
@@KuyaPow626 you have to be the only buyer on a buyers market…
But if you skipped the buy down and put that $5000 in mutual funds that averaged 8% over 30 years, it would become more than $54,000. The likelihood of someone keeping a mortgage for 30 years without refinancing when interest rates dropped seems small. Alternatively, the difference in mortgage pymt between a 6% and 5.75% rate is about $75.89. If you paid the $5000 buy down and invested your $75.89 every month for 30 years, at an 8% average return, you'd have over $113,000. So I guess it depends on how disciplined someone is and how long they keep that mortgage before recouping the $5000.
🙌🏽
Thank tou
correct, the buydown math is a lot less appealing if you account for opportunity cost.
but I don t see a mutual funds that give you 8 %
Would the math change if you offered $5,000 more for the house but got that in a mortgage rate buy down so you financed the $5,000 onto the loan?
Buy down doesn’t make sense if you put 10% down. It would be better to put that towards your down payment and make extra payments to the principal. Plus, you can always refinance, in which case you don’t benefit from the buy down at all.
My interest rate is only 4.50%
when did u buy ?
my credit score is 790 and no debt and i got 6.99% !!
@@hfunny28
2013😅
Yeah you can refinance when it comes down. The issue is you don’t know when it will come down
Really great explanation Javier. Easy to understand. Note: You are losing a small amount on your mortgage interest deduction when your interest payment is less. It's probably inconsequential relative to what you save, but still worth putting into the calculation based on your tax bracket.
Great video. One point to note, ensure homebuyers know on your Buydown Calculator that the maximum amount of buyer paid fees + points is 3% per federal law. So showing a 3% example, doesn't leave room for other related lender fees. If the sellers provide a seller concession (up to 3% or 6% of loan, depending upon loan type) those can be applied to discount points, fees, or even a 2/1 or 3/1 buydown to lower the payment until the rates come back down in the next year or so. Keep up the good work.
Didn’t know this!! Thanks!!
I think I would pay down the mortgage with the extra 5 or 10 k as interest may be lower in 2 or 3 years and you could refi the loan.
When I bought my house last year, the interest rates were around 2.5% +/-. I bought my interest rate down 4.5 points to 1.375%. Although the 2.5% was a good interest rate, the area I was buying in has higher taxes plus I bought I'm an HOA community, so I wanted to get my monthly payment as low as comfortably possible and buying down my interest rate to afford more house was what I did.
How much did 4.5 points cost you?
@@swiftguatemalanchili2301 $9250
@@MsFox2u it’s probably more expensive now to buy down points because of the rising rates :( . We are getting a new build but these rates are scary. Glad you got your house when you did.
@@swiftguatemalanchili2301 Exactly. Good luck to you.
@@MsFox2u so we locked in our rate, 6.025% interest and we still had to buy points but we’re making it .
But then again, every time there’s a dip, like the one we just had, that’s when you want to refinance at 3% or lower. So keep your 10k don’t give to the bank, pay more into your mortgage per month as you can, say extra $100 - $500 per month and wait for the dip. Downturns come every 10 - 13 years.
I agree with you. And in this market we actually see a refinance opportunity every 4 to 5 years
In this market, ask for closing cost + point buy down. Take advantage
To ‘buy down’ your interest rate, look for ways to reduce the amount of interest you pay. This could include talking to your lender about interest rate reductions, shifting higher-interest debt to lower-interest loans, or consolidating multiple accounts. Doing so can help you save on overall interest payments and work towards your financial goals faster!
It will be interesting if you can invite a lender to explain why some do not agree with this. I was reading some of the comments and some agree that it would be best if you put the money towards the principle… Would love to hear an expert speak on this.
I’m wondering the same thing 🤔
I so agree with you on this. It would be better to have a lender on to explain why this actually does not work out the way people think it does. The average time somebody keeps the mortgage is actually seven years. Buying points rarely if ever mathematically sense.
I watched so many videos of people explaining the 2-1 buydown. This video actually explained it super clearly! 🤯
Points are tax deductible as a prepayment of interest.
I did a 2pt buydown that dropped my monthly mortgage payment down $1500. Still it is better to have a 780 or better credit score across the board, do a 20% down, get as many concessions from the seller and then finally see what the interest buydown is to see if it makes sense or not.
If you have solid credit and a decent job, check your local credit union as they will most likely have the best rates. Look around at your choices and join the one with the best rates to establish a relationship with them. As of today, July 2, 2022, my credit union is 4.75% conforming or jumbo on 30 year fixed.
Can you compare how much the monthly payment would drop if you just throw that money into principle? (Which can also lower your monthly payment)
Yes I’m wondering this as well!
More people need to ask this question.
One important point I’d like to add is that you should check the interest savings against the scenario if you were to invest the cost of the rate buy down. You could take the $5k or $10k and invest in the market and earn a 7% return or some. If you consider that, then it does diminish the savings because you’re adding in the opportunity cost of using that money elsewhere.
It's really all about luck and timing. Let's say 2 years ago when rates were around 2.75-3.00% for a 30 and someone, instead of using their $10-15k to buy down a rate to a guaranteed ~2.25, decided to invest in the monies in the hot ETF-of-the-day ARKK. Right now their investment would likely either be flat or down.
How do you know where to invest?
@@WilChu this was me, well I wasn’t buying a house but I was all in the ARK ETFs and some other hit stocks and have lost money overall. At my peak I was double my investment. I was tempted to invest a large portion to save for a house faster and am glad I didn’t or else I wouldn’t have 20% down for the house I just bought.
Thanks for great info Javier but there may be some missing topics and I'm not sure if I'm right or wrong. I heard from others that 2-1 buy down is only temporary and after 2 years it will come back again to original mortgage interest rates not unless if homeowner refinance. Second, I'm a Realtor who helped a buyer this year who didn't pay for her discount points. Why? I negotiated with the seller to pay it during closing. So yes! Buyers need an experienced Realtor to help them save money.
Hey javi, I appreciate you making this video, however I disagree with your conclusion for 2 reasons: 1) the likelihood of someone owning the property for 30 years is extremely slim. Even if they did keep it for 30 years, thanks to inflation, this debt in theory will be easier to pay because they will likely also make more money, so the interest savings over 30 years shouldn’t be a main motivator for the rate but down. 2) more importantly, rates are not going to stay this high forever. I think it would be better to not spend money on points now, and then use the money you were considering using to buy points to refinance in the future (maybe 3-5 years from now) to something much lower.
I was thinking the same thing. We just bought a house and our lender told us our interest rate on our loan is not forever. We can refinance as soon as interest drops.
Yes but then how does Javier get the money if not by points?
interesting. I think my only counterpoint is that most peoples income almost never rises at the same rate as inflation. at least since the 60s-70s to my knowledge.
@@lostwun347 as long as their income rises at a rate higher than the interest on their home loan, the loan becomes “cheaper” to pay over the long run.
@@Monicamcs the main point here is if interest didnt come down till the Break Even months. means if buying 2 points and differnce in payment will catch up in say 24 months and for that 2 years the interest didnt comedown . then the concept worked. since you cannot refinance. but if it comes down like the vender said then buying point is a loss.
What's the difference with putting more down/buying points? Where is the break even point in that scenario?
You would have to run the numbers through a mortgage rate calculator.
It also depends, on the market where you live; the down payment may sway the seller towards you. Buying down points is a lot of money if you intend to keep the home for 30 years. 1 point is approximately 1% of the value of the home, paid upfront, that may save you tens of thousands of dollars throughout the lifetime of the home loan. This is a strategy that I'm thinking of using, because many more buyers are on the sideline now, compared to a few months ago, and I may get an offer accepted.
Putting down more money lowers the loan amount being borrowed and buying points lowers the interest rate that your paying for the 30yr loan.
He said it’s 65months.
So, what happened when you spend the money to buy-down and the. 6-months later; the interest goes down and you could still refinance to the buy-down interest rate? Wouldn’t you waste that buy-down money??
What about refinancing when interest rates drop?
If they do...
How much does this matter when the average homeowner sells 5-7 years after buying….then if you account for inflation, the interest savings after 30 years isn’t as substantial. The $70k in savings 30 years is in todays dollars and will equal about $34k in 2052.
Agreed. I am a lender. Rarely does buying down rate make sense.
Haga videos en español hermano, hay muchos interesados que no dominamos al 100% el ingles y muchas veces las terminologías nos confunden.
Está muy muy bueno tu canal!!
Hi Javier, thanks so much for the info. Does it make sense to put more down payment than buying points? Esp to get rid of the PMI. Does higher down gives you an advantage? Thanks :)
I just locked in 4.75% for 270 day. Also bought down .675 in points. 7 years to see a return.
Are you staying for 7 years?
@@sobeliever1638 correct at least 12. For all 4 kids to graduate from school.
It’s not a question of if you are staying in the home for seven years. It’s actually a question if you were staying in the mortgage for seven years. Fortunately for CTS2NV, do you like they are going to get to float down or change to another lender within the next 270 days because rates will likely be lower. But the question people should ask themselves is not whether they plan to stay in the house for seven years it is actually what they believe that interest rates will drop and give them an opportunity to refi Within the next 2 to 4 years…… I believe the answer to that question is yes.
It’s not a question of if you are staying in the home for seven years. It’s actually a question if you were staying in the mortgage for seven years. Fortunately for CTS2NV, do you like they are going to get to float down or change to another lender within the next 270 days because rates will likely be lower. But the question people should ask themselves is not whether they plan to stay in the house for seven years it is actually what they believe that interest rates will drop and give them an opportunity to refi
Have you checked the math if you make no extra points payment, but then send in a large let’s say (10,000) principal payment?
I’m thankful I bought my Condo in 2020 and got 3.125 apr. My mortgage is 564.00. Including escrow for taxes and insurance. Rates are 6.6 now! More than double.
This was really good, make sure to ask the sellers for 3% concessions for a interest rate buy down
I got my interest rate bought down from 5.75 to 4.75. Seller got smacked over the head by the inspection report, and we damn near got max concessions. That was used to buy it down.
Did u negotiate concessions after the original offer ? Also wht exsctly are they ?
This good info. Thanks for explaining. People just need to remember refinancing their property is the same as selling your home… so keep this in mind when considering whether to buy down rates.
How many points can you buy down? Can you get it back down to 3.5% etc...with enough money?
At this time, there’s no way to get back to 3.5% on a 30-year fixed mortgage.
I am a lender. 90% of the time it doesn't make financial sense to buy down rate. In todays market I think it's an even worse decision to buy rate down.
Reason why. We are heading into a recession. Meaning rates will naturally drop in the near future. Spending 10k right now to save .75% interest rate isn't good value. If you just got a mortgage at 6%. Wait a year or two. When rates go back down past 5%. Refi. Cost 4k, not 10k. And youll have a better rate to boot.
It won’t take no 2 or 3 years for rates to go down lol it can take 10 years
Isn’t a refi usually in the range of $10K
Also makes little sense to do lender paid for brwrs as well with rates inevitably coming down then the lender having to pay an EPO fee. Borrowers want immediate savings and if it's at your expense they'll do what's best for them. You can't blame them.
Wait, Javier, aren't buy downs only temporary? Like a lower interest rate for only the first 2 years or so? Or are there permanent rate buy downs? Is it all just lender dependent?
They are TEMPORARY. It's only to help until the interest rates "hopefully" go down. If the Buyer can't afford the home at the given interest rate, they should not be purchasing the home on the hopes that the market will turn around in max. 3 years.
@@sandersshameka31 Relax 😌 Using buy downs isn't just for people who "can't afford" something. You may get additional seller's concessions and need to apply it towards closing costs... there are different places to apply the funds, and buy downs are one option.
What about just paying down principle? I’m already locked in and closing in 2 weeks
10k to lower interest by buying points saves you a lot more than 10k additional in down payment. Assuming you are putting 20% or less down. Not sure about 20% plus
Pay yourself rather than the lender.
Just do what I did and model all scenarios before you do it. I’m paying off my mortgage early (within 10 years) and buying down was only 1400 and I save myself a few thousand over 10 years by buying down a little. It’s not much but it was worth it for me.
I have been waiting for this video:
It’s simple and straight to the point
11 mins of Gold
I will easily pay 10K to Save 70K 🤓🖤🏡📶💰 “Thank You Javier”
I think this the Best Video in the last 3 Months!!!
What about keeping the free interest price, and paying a bit more month to month and having that $10k in your savings in case things go south. (Treat it like the house savings, not with your personal savings.) would it come out the same long term?
How do you figure out if this is better than putting that money towards a bigger down payment/ take out a smaller loan???
An additional $10,000 would lead to paying $33,000 less in interest over 30 years on a 5% mortgage.
This would also be equivalent to buying down your interest rate from 5% to 4.625%.
Have a mortgage lender put together a Total Cost Analysis for you to review the options - more down vs. less down, buying down the interest rate versus not buying it down etc. @thatmortgagecouple if you ever need help. Thanks
Thank you for the video, can you please let me know how the 1% discount point can drive the quoted rate from 6% to 5.75%, any mechanisms behind it?
Just watched this buy down video, very good however I'm a bit confused. My lender said they too offer a buy down but it doesn't cover the whole 30 year mortgage. He said I can buy it down for two years? Each year it goes up a percentage point until it's back to the current rate? Who would bother with that??
Thanks, I understood everything except breakeven. Could you explain the breakeven thing.
The years it takes to break even 5k or 10k that u were showing.
But my main question is, do the points that you buy last for the life time of the loan or they just last a certain amount of years?
Keeping the same strategy in mind of long term thinking. I’m perfectly fine if my equity is negative. Did I over pay? Sadly yes. My interest rate is 3.25 and mortgage is super affordable but I’m screwed if prices tank and I need to sell. I think my only logical option at that point will be to rent my house out.
😅😂
Mine is 3.85 and i overpaid 45k. Its okay it will balance out after 4 to 5 years
Your doing good bro and have a good plan. What if there is a correction and prices climb after that? The waiters are probably still going to wait like they did from 2020 on. I know a guy who chose to wait for a crash and is still waiting. Now he's desperate and looking at middle of nowhere places. That's all he can afford now.
@@internalharm how you got 3.85 thats really good.. i got a pre approval with chase and its 5.8 and i have 800 credit and putting dpwn 20%
I wonder if it would be worth buying points if i have half of the cost of the house cost saved already and the other half will only take 3-4 years..i would guess probally not. I worried if the bank finds out this they won't want to do the paperwork or loan knowing i'll pay it off in a couple years like my truck 🤣
Javier, you are a gem!!! Thank you for always being so informative and also entertaining
Say 10k gets ya 5% back per year. In 5 years it’ll be $12500.
Good chance rates will on the downswing if companies are offering buy downs. Take that and refinance to probably lower than the buy down.
With that down payment amount I think insurance would also be a factor and I don’t see that added to the totals unless I’m missing something.
I'm just curious in the difference between the lifetime interest you would pay if you just add 10k to the down payment, keeping the free interest rate, and if you buy down .75% interest with the 10k. id like to see that math.
not to mention, interest rates change constantly. youre paying 10k for .75% discount when in 4 years (hopefully) the rate may be a full point or more lower. 10k or less to refinance to the new rate. I guess you gotta hope the actual interest rate doesn't dip lower than your discounted rate before you make the money back through monthly payments if you choose to buy down.
I just got off the phone with a lender. I wanted to buy every point allowed and she kept trying to talk me out of it. Break even would be 7 years. I planned to stay there until my 4 kids are out of school, at least 15 years.
@@cts2nv so basically youre betting that interest rates won't drop below your discount rate in 7 years?
@@lostwun347 yep, thats what im thinking.
You were correct! The rate is now as low as 4.25. I haven't sent them the payment for the lock yet, so i get to re-price (renegotiate i guess).
Lennar is offering in my area 30k towards closing or a 2/1 ARM. Intro rate at 3.75%, year 2 @ 4.75% and year 3 and beyond at 5.75%
I thought those short term ARMs were still illegal. You've got a recipe for foreclosure there.
Don’t get sucked in by Lennar. They need to reduce the price by $50k-$100k. They kept sending me email. I told them don’t email until they reduce the price by $100k.
@@Hummer999xx
Same here they need to feel pain. I ain't buying until it's back to ATLEAST 2019 prices. Which won't be too long.
Wow never heard of a 2/1 ARM,I guess military families use that?
you're gonna get punished . Stay away from such short term. Maybe 7 or 10 minimum. Too scary or just stick with a 30 year buy points if it makes sense. let the numbers talk along with the risk taken
You don’t think they will come down in 2-4 years? If we do hit a recession and unemployment goes up, rates will come down..
There's two 'ifs' in your theory: 1. If we hit a recession and 2. If due to the recession unemployment goes up.
One thing I can say with certainty: I dollar today is worth more than a dollar tomorrow. For this reason, a principal payment makes more sense to me the majority of the time. However, either option is better than holding on to the cash
@@albertcamus5970 I liked your novel The Stranger. I read it like 10X in college. It was so haunting.
Javier, how many points can a person buy?
3 total percent or points (loan costs and discount points) are the maximum amount if paid by a buyer. However, a seller can provide between 3 and 6% depending upon loan type. To maximize the benefit, have the seller provide the most seller concession you can get, then apply that to discount points, adding your own depending if the math makes sense. Then hold your cash to refinance down the road when rates drop. I hope that helps -
If you invested the $5000 for 30 years you’d have around $35000 (assuming 7% year over year). Is buying down points really worth it after you factor in the time value of money?
Where is that investment that wwould have given me 7%?
@@Miranda3730 annualized S&P 500. The most common/generic stock market investment.
Depends on what you do with the savings. If $5,000 saves you $75/month and you invest that $75/month into the same market, you’d have $85,000 after 30 years.
In 30 years if I’m already a millionaire will I really care about a 35k difference?
Rate of return for investments vs. discount points isn't a common consideration. We look at buying down points based upon two things - How long you plan on being in the home? Hence the break even period on if buying down makes sense. How comfortable you are with the payment and the amount of cash you have after the closing. You'd want to ensure your payment fits your overall budget/lifestyle and that you have enough cash left over after the purchase to cover for unforeseen events. We'd recommend 3-6 months worth of living expenses at least in saving after your purchase. The more common question on rate of return vs. investments is down payment - putting less or more down to improve the interest rate etc.
Can you share with us what software you use to where there is a little box of you in the video in the corner?
Excellent video I was always wondered about this thanks!
What if your not going to sell the house but you want to refinance if these crazy rates ever drop back down is it still worth it to buy it down even if you are hoping to refinance?
What if you paid extra towards the principal each year?
Do you have a link to the calculator spread sheet you used?
Would it be better to add that on to the down payment instead or more each month instead of buying down points?
What if you just use that money to pay the principal more instead?
Which to chose from, 5% of purchase or rate buy down
You could invest 10k over 30 years and have 76k at 7% avg, imagine buying points and in a few years rates go back down for free.
By this logic, you could invest the $188/month you saved on the monthly payment by buying down the rate. After 30 years and 7% average annual return, you would have $229,355.
what do you mean get your money back? are you doing more than just breaking even?
It's so sad that we have to pay 2x to 3x for homes and also have to spend money to bribe banks
Some people are betting rates will come down before the 4.2 year breakeven point. They are planning on refinancing before 4.2 years. No one has a crystal ball, and no one has one single answer to this question.,
What about not buy down but pay extra mortgage toward principal
Can you buy interest points using home equity?
Does the lender determine how large the down payment has to be before the discount points can start to be applied?? I’m a little confused in regards to that because the down payment would be different per person, so if someone low balled their down payment does that mean they could save up the same amount they were originally planning and get the discount points applied??
I have 3 but I want to move, and I want to build from the ground up.
So question am i wrong for thinking i can buy my rate down to 4 instead of 6 or am i misunderstanding
All I can see is that it's 105 degrees, and I'm like, "DANG!"
No way you can call this a no-brainer, without at least touching on opportunity cost.
Exactly
Where I can get this spreadsheet, it's on your website as stated
Very nice explanation! Thank you!
Checking if buying a point makes sense
1. Calculate the monthly amount for the interest rate at 0 points(A)
2. Calculate the monthly amount for the interest rate at x points (B)
3. Calculate the difference between the two monthly amounts (A-B)
4. Calculate the Payment for buying the point (loan amount * x/100) say Z (check for other costs such as underwriting fee, processing fee, loan origination fee, etc.)
5. Divide payment by the difference divided by 12: (Z/(A-B)/12)
The answer is the number of years it will take to gain that point back. If the answer is less than the years you plan to stay in the house, go ahead and buy it. Else, don’t
I bought in at 3.0% and sold at 6.75%. Haters gonna hate!
Excellent explanation. Thank you!
I would never put that much money down up front for only .25%. I rather recast each year and wait a couple of year for rates to fall and refi at half that interest then continue to recast.
I would rather throw that 5k into mutual or index funds. 10% in gains is far better then saving .25%.
Thank you Javier for the great insight information about the buying down points. I appreciate the power point with examples, it helps me understand.
Well, it's 2022 and interest rates are at 15 year highs of 6-7%. I personally dont believe buying down the interest rate is worth the cash, as at this point, ANYONE who buys a house right now WILL ABSOLUTELY NEED TO refinance once rates come down from these highs. So there's no point in throwing away 5-10k trying to lower your rate NOW when you WILL refinance in 2-3 years.
Ugh I signed for 1 percent buy down, about to cancel that as she wasn't well informed
Is there only one interest rate and not necessarily by state?
I'm currently buying a house the lender said if want to pay down the rate at first my husband and I were going to, but then we figured what if rates drop next year and we refinance then we loose out of 5,000 to buy down. So idk if we should buy or wait?
That's what I'm wondering right now too, we are weighing our possibilities, because we should have enough to refinance when rates drop in the future
@@averageinvestor4986 that's how we are too. I saw they they expect them to drop in the end of 2023, and if we buy down point it'll take about 3 years to recoup it. So it's just confusing because you hear so many different things.
I’m pretty sure in the next 5 years rate will come down. Save the money for the refinance.
I'm facing a similar conundrum, debating whether to wait on buying. The Fed has signaled that they're going to keep raising interest rates to combat inflation... & it's not going to work since our current inflation is supply side & gouging related (raising interest rates targets demand related inflation)... So it's likely they're going to keep raising the rates in a vicious cycle for awhile. Point is, the interest rates are going to come down eventually, but doubt it's going to be as soon as next year. If anything, next year's rates are likely to be higher. BUT what will probably be a lot lower is the cost of the homes, since we're heading into recession (maybe even stagflation woo so fun 🥳). The way I figure it, if I buy now I should pay down the interest rate as much as possible, especially considering the value of the home is probably going to drop... Or I can continue to save and wait to buy when home when prices are better in a year. I think I'm going to wait, but that's because I don't intend to buy in a crazy tight house market where investment buyers will keep the home prices somewhat inflated even in recession.
No one has a crystal ball if you can afford the monthly just do it. If they drop refinance.
Thanks.
Quick question if they were to put that money towards the principal would they save more money in the long run?
I just bought with Downpayment assistance @5% and wasn’t able to buy down. I received $30k from CalFHA that will be forgiven in 5 years and can’t refinance for possibly 5 yrs
I say possibly because I know ppl who were able to even though they too were told they couldn’t. I degree
I still have my $40k in the bank. 🎉
Should I pay down the principal? Or wait until I refinance (if I can….later) then buy down. 🤔
With a 5% rate I wouldn't pay down the principal. The average return in a normal stock market is ~6%. If you invest the $40K you'll earn more in the long run, especially considering the 5% interest rate is also tax deductible, so your real rate is less. Also down payment assistance programs you aren't typically able to buy down interest rates, as they are set by the assistance program themselves.
Was that the OOT intro music on the background?
Just purchased my home in April and bought down my rate to 3.9
I'm glad I took another step in getting a new home. I bought my second expensive house last two weeks paid in cash, I feel so happy for myself and my achievements watching this random video. So glad I made a good decision about my finance that changed me forever. Thinking of building a barndominium. just hope it encourages someone that it doesn't matter if you doesn't matter if you don't have any of them right now, you can start TODAY regardless your age INVEST and change your future! investing is a grand choice I made! great video! thanks for sharing! I love this.
Cool chart and it helped. I’m about to get fucked buying a house. Question. What if house purchase price is 350. I get a loan for 325k I put 25 down whatever/ What if in 3 years I have 300k to pay off my loan? Do I still have to pay the bank interest?
Loan amortization.... your payments at the beginning go mostly towards interest over principle. So you've paid the bank interest for 3 years
The slide presentation looks very colorful, clear and cool!
I would never buy down a rate. I would use that money to increase my down payment amount then down the road when rates drop refinance.
Javier if that 10k to buy down the rate was added to the Downpayment would it have a similar effect in the long term?
Absolutely. Your loan size is smaller and your monthly payment goes down. (Forever) All the lender does is front load the interest you would have paid had you not bought down the rate, they are taking a gamble on that breakeven to win because historically most people don't keep the loan long enough for it to be worth it.
@@captainviper3888 so is it better to use that 10k to buy down the rate or just add it to your downpayment?
@@ramenandgyoza702 The answer is always 'it depends'
If you can't make up your mind, do $5K worth of points and 5K worth of buy down
Lowering the loan amount by $10K won't have a big impact on your payment or your total interest. I would be better to consider having the seller provide seller concessions (in this market especially), and use those to do a 2/1 or 3/1 buy down. that lowers your rate for 2 or 3 years, then look at refinancing as rates drop in the coming couple of years. Keep your $10K for the refinance or for reserves should something happen down the road.
thanks Javier!
What’s a good interest rate on a 5yr mortgage ?
Hello there. A 5 year mortgage doesn't exist. Mortgage terms are 30, 20, 15, and 10 yr. There are a few off companies out there that vary slightly but what you'll find is anything off the standard terms of 30 and 15, the rates will typically be higher or the same. The reason for that is rather complicated, so we'll skip that part. However, I think what you mean is more you plan on being in a home for 5 years and want to know the interest rate - if so that really depends upon how much your putting down, your credit, and the loan program, not to mention as Javier indicated - you might buy down the interest rate in a few different ways. So I'd encourage you to contact a lender (we're one if you'd like) and get the specific rate for your particular circumstances @thatmortgagecouple
thank you so much for uploading this video - SUPER HELPFUL!!!
Video Creator how do you make your money?
Isn’t that a LOZ song playing in the background?
Instead of putting a band aid on the slowing housing market, how about we (buyers) wait until the housing market actually corrects itself to buy again? Houses are still 40% - 50% overvalued. If we keep buying houses the prices will never come down. Don't buy down your rate, wait.
That extra money can also go towards the down payment, meaning the loan amount would be less. You gotta factor that into the breakeven too
Great explanation, thanks!!!
Great breakdown! It really helps to understand the system better