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Is a Mortgage Rate Buy Down a Good Idea or Not?
|  | Hope everyone enjoyed their 4th of July and having a great summer so far. I can’t believe how fast the summer is flying by.
The Tucson real estate market is evening out a little. Last month had 1725 new listings and 1141 closed listings in the Tucson Metro area. The average days on the market is 23 and may vary slightly depending on the area. The current average sales price is $429,325.
Since the rise of interest rates I have been asked by several clients if I thought this was a good idea or not to buy down the interest rate. My lenders do a great job of showing an analysis to my clients of what this looks like in upfront costs and monthly payments, but navigating the world of mortgages can be complex, especially with the various options available to fit your financial situation. Understanding the concept of a mortgage rate buy down, particularly points, can help you make informed decisions and save money over the life of your loan.
What is a Mortgage Rate Buy Down?
A mortgage rate buy down involves paying extra money upfront to reduce your mortgage interest rate for a portion or the entire term of the loan. This upfront payment is known as "buying points" or "discount points."
How Do Points Work?
When you buy points, you're prepaying interest to receive a lower rate on your mortgage. Here’s a breakdown:
- Cost of Points: One point costs 1% of your loan amount. For a $500,000 mortgage, one point would cost $5,000.
- Interest Rate Reduction: Buying one point usually reduces your interest rate by 0.25%. This varies by lender and loan type.
- Break-Even Point: This is when the savings from your reduced monthly payments equal the upfront cost of the points. It helps determine if buying points is financially beneficial.
Calculating the Benefits
Let's look at an example to understand the impact of buying points:
- Loan Amount: $300,000
- Interest Rate Without Points: 4.5%
- Interest Rate With 1 Point: 4.25%
- Cost of 1 Point: $3,000
Without points, your monthly payment (excluding taxes and insurance) would be about $1,520. With one point, it would be about $1,476, saving you $44 per month. To find the break-even point, divide the cost of the point ($3,000) by the monthly savings ($44), resulting in approximately 68 months, or a little over 5.5 years. If you stay in your home longer than the break-even period, buying points could be advantageous.
Pros and Cons of Buying Points
Pros:
- Lower Monthly Payments: Reduced interest rates lead to lower monthly mortgage payments.
- Interest Savings: Over the loan's life, interest savings can be substantial.
- Tax Benefits: Points are often tax-deductible in the year they are paid. Consult a tax advisor for guidance.
Cons:
- Break-Even Time: If you plan to sell or refinance before reaching the break-even point, you won’t recoup the cost.
- Alternative Investments: The money spent on points could potentially be invested elsewhere for a higher return.
When to Consider Buying Points
- Long-Term Stay: If you plan to stay in your home for a long time, the savings from a lower interest rate can outweigh the upfront cost.
- High Cash Reserves: If you have enough savings to cover the upfront cost without depleting your emergency fund, buying points can be a good investment.
- Tax Considerations: If the tax deduction for points benefits your overall tax situation, it might be worth considering.
A mortgage rate buy down can be a smart financial move, offering lower monthly payments and significant interest savings. However, it requires careful consideration of your financial situation, future plans, and mortgage terms. Always consult with a mortgage advisor to explore how buying points might work for you. If you have any questions please contact me and I can refer you to Tucsons best mortgage advisors. |
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| | Home Organization Tips and Hacks | | If you or someone you know thinking to selling or buying a home or land, please share my name. Also, if you need help in getting your home ready to sell and get the most out of your investment, please call me today for a consultation. As your "Tucson Designer Realtor" my team and I can help.
Scan the QR code and set up your personalized home search and receive properties that match as soon as they come on the market. If you would like to see any properties please let me know and I will set up a private viewing for you.
Again, thank you for all your referrals and your support of my business. My success is because of you. Diane
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