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The Membrane Domain
The Interesting Points of a Mortgage Buydown
Click Ahead in
Time
Interest Rate Trends
As you can see on the graph below, interest rate trends have no course.
There is volatility in a small range of rates. For instance, the 30 year
fixed rate mortgage, with 0 points, has been between 7.625% and 8.25%.
Historically speaking it is not a bad rate in either case. The risk can
be eliminated even further by locking-in and floating
down. For now the market appears to be waiting for a sign.
An Interest-ing Question
Q:
I had a small question to ask so I mailed it
electronically for your convenience and safety.
We're considering a the purchase of a house with a mortgage amount of about
$200,000. It has potential, but will need about 10k of work (if we get it.)
The sellers are featuring a mortgage "buy-down" worth up to
4pts. Currently, the real estate company says we can get a mortgage
at 61/4% if we put down an additional 3pts and use their services.
What the heck's going on?
A:
A buydown is a temporary solution ... that is why it is called a
"temporary buydown." What you are doing is putting a large chunk of
money (in this case about $8,000) into a fund (called a buydown subsidy)
at the bank. For the
first two years, the bank takes some of the money out of the fund each month and
helps you make your mortgage payment. Your mortgage and note rate are always
the same (in this case 7.5%) It only feels like an interest rate of 5.5%
the first year and 6.5% the second year.
Q:
Is there a catch with the buy-down? Can you get us a buy-down?
A:
Yes, I can do the exact same thing (or better).
Is there a catch ... yes. It is probably not the best use of your money.
If you could use the $8,000 any way that you wanted, would you choose a buydown?
I wouldn't. I would either:
Buy the rate down permanently (like use the money towards points on
a 30 year fixed rate). This is still not the smartest thing to do.
Use the money toward my other closing costs. This is what I would do.
Keep control of the money.
Take 8k off the purchase price. (Better than a buydown.)
Q:
If we're putting 7 combined pts down up front, can we get a better
rate.
A:
Sorry to say it, but it is a ludicrous financial decision to pay 7 points to buy a rate down.
It will take you about 15 years to break-even! Ouch! You will either re-fi,
move, pay it off, or die first. And, we didn't even talk about the opportunity
costs -- if you put the 7 points (14,000) in an
investment,
it will be worth $56,000 in 15 years. You'll just be recapturing the $14,000
you put out in points.
The only time I suggest a buydown to someone is when they HAVE to do it
to qualify for the loan.
DANIEL BROUSE
e-mail brouse@membrane.com
(800) 783-9333 x192
(610) 397-0330 x192
Beeper 215-960-5556