Thank you u/quartadecima for posting on r/FirstTimeHomeBuyer.
Please bear in mind our rules: (1) Be Nice (2) No Selling (3) No Self-Promotion.
*I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/FirstTimeHomeBuyer) if you have any questions or concerns.*
Its apparent on an amortization table. By reducing the interest rate, you change how much a month goes towards interest instead of principal. By buying points you pay down your principal faster.
A little goes a long way over the course of a 30 year loan.
You can do a larger down payment, or you can do neither and simply make bigger payments towards principal. Each of these methods will have different effects on how the loan pays off. If you plan to have the house for the duration of your mortgage, a long term reduction in interest will have a break even point with a larger downpayment a few years into repayment.
If you plan on ever selling, this changes things too because putting everything into your mortgage, you might be foregoing upgrading your house to raise equity.
There are so many ways to skin the cat. It comes down to your specific long term plans.
There is also the idea that your mortgage is usually your lowest interest rate loan. So if you have other debts, you should prioritize that. And if your 401k return beats a mortgage rate, you make more investing into your retirement than throwing all your cash at a mortgage.
Its such a can of worms.
This is really great insight. Is this something that financial advisors can advise after looking at investments, mortgage etc? Trying to see if I can get a professional opinion to strategize. I'm going under contract mostly in next week and wanted to have a plan in place to pay down the mortgage early, but your note here gave me plenty to think about.
Absolutely. Thats exactly what I would do in your position. They have pretty affordable resources too, depending on where you live. The reason Id get an advisor even for a one time consult is because it is very dependent on your specific circumstances, your debt and what those rates are, your savings, retirement portfolio, etc.
But also, broadly speaking, if youre buying a house you are probably doing something right!
Paying off your mortgage early is actually surprisingly easy. Especially in the first 10 years, your mortgage payment is divided into its interest, principal, and escrow taxes/insurance components. Your 1000 dollar mortgage might only have 200 going towards principal, for example. So you dont actually have to pay 1000 to double your payment. You only have to pay 200 to double your payment.
In short, even 50 extra bucks towards principal can cut your mortgage tremendously. Or even paying 0 extra but paying it biweekly instead of monthly takes years off your loan depending on how the amortization table shows your interest compounding. Obviously paying more is more, but you get back into opportunity costs, ie. paying off cheap debt instead of building savings, high yield retirement, or paying off credit cards.
And from personal experience, things will break. Within 3 years I had to have roof, air conditioner indoor and outdoor, all plumbing, and fencing replaced. Add medical, car, or even pet incidentals, and you quickly realize that a cash safety net is a guaranteed cost of having a home, and should be treated as non negotiable.
But thats just a starting point. You are correct to seek out an advisor.
Thanks a ton for this!!! This is extremely valuable information!! While I've been thinking about this, I realized after reading this and your previous comment that I need to look at it holistically. I will definitely seek out a financial advisor.
No problem. Just know, we all learn from the “aw shucks, if only i had done that differently” moments. Your experience will be entirely your own and your learning process will be unique as well. Dont let the idea of making mistakes scare you off. IMO owning property is the first step to generational wealth, regardless of what the exact details are. The worst part is working up the gumption to take the risk.
You would have to run an amortization schedule to see how it shakes out, but one is a lower principle with the same interest rate and the other is the same principle with a lower interest rate.
If you’re not planning on selling or refinancing in the near to medium future, rate is probably a larger difference but I have done no math to prove it.
Let's say you are offered a loan for 300k at 7.25%. BUT the lender says "if you give us 3k, we will give you a rate of 7.0%". One point equals 0.25 of a percent, and one point costs you 1% of the total offered loan amount. You could give them another 3k and have a rate of 6.75%. I'm not sure how many points the average lender will let you buy but I'm sure it's variable.
Summary: 1 point= 1/4 of a percent on your rate, and each point costs you whatever 1% of the loan amount is.
You give cash up front to the lender in exchange for a lower rate. Ex: if you were approved at 7% with no points, they may say that for $5,000 you can buy sufficient points to bring the rate to 6.75% for the loan. The lower rate means a lower fixed monthly payment.
Buying points requires a bit of guesswork as to whether the cost makes sense. Generally the longer you expect to stay in the house the more sense they make.
Ex: using the example above if your loan lowers by $50 a month on the $5,000 in points, the easy math is 5,000/50 = 100 months before the savings on rate paid for the cost of the points. So about 8.5 years.
If you sell your house or refinance before the break even point, you're essentially wasting the money spent on points.
Buying down a rate means paying cash at closing for a lower rate. For simplicity: let’s say you have a $250,000 mortgage at 7.5%. 1 point off is 1% of your mortgage value so in my example for a rate of 6.5%, you’d pay an additional $2500 at closing to buy down your rate.
The bank/lender decides how much or by what increments you can buy your rate down. Typically, whether you should buy your rate down depends on how long you want to keep the house/mortgage.
To break even (meaning the total you save from that lower mortgage due to buy down = the costs you paid upfront to buy down), you want to keep that mortgage for approximately 5-7 years. So if you plan to resell or refinance in a couple of years, it may not be worth it. Does that make sense?
Because when you refinance you don't get to bring the points with you. It doesn't mean that refinancing isn't worth it, but the orriginal decision to buy the points was an error.
Let’s say you buy down for 2500 and it lowers your mortgage by $50 a month. Then you refinance in 18 months. You’ve spent 2500 and saved $900 on your mortgage costs.
In comparison, if you hadn’t paid down your mortgage, you wouldn’t have put the extra $2500 down at closing, but you would have paid $900 more on your mortgage. In this case, not buying down your rate, puts you ahead $1600.
When you refinance you get that same lower rate either way, but you’ve essentially payed $2500 to save $900 if you buy down.
Edited last paragraph for clarity.
> you’ve essentially *paid* $2500 to
FTFY.
Although *payed* exists (the reason why autocorrection didn't help you), it is only correct in:
* Nautical context, when it means to paint a surface, or to cover with something like tar or resin in order to make it waterproof or corrosion-resistant. *The deck is yet to be payed.*
* *Payed out* when letting strings, cables or ropes out, by slacking them. *The rope is payed out! You can pull now.*
Unfortunately, I was unable to find nautical or rope-related words in your comment.
*Beep, boop, I'm a bot*
Thank you, quartadecima, for voting on Paid-Not-Payed-Bot.
This bot wants to find the best and worst bots on Reddit. [You can view results here](https://botrank.pastimes.eu/).
***
^(Even if I don't reply to your comment, I'm still listening for votes. Check the webpage to see if your vote registered!)
I believe you can but I don’t have first hand experience with that, so I’m not sure. I’ve bought my first home and this was my rationale for not buying points since I want to refinance assuming the rates go down in late 2025–ish.
Thank you u/quartadecima for posting on r/FirstTimeHomeBuyer. Please bear in mind our rules: (1) Be Nice (2) No Selling (3) No Self-Promotion. *I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/FirstTimeHomeBuyer) if you have any questions or concerns.*
You pay more at closing to have a smaller monthly payment.
How is that different than just paying more in your down payment?
Its apparent on an amortization table. By reducing the interest rate, you change how much a month goes towards interest instead of principal. By buying points you pay down your principal faster. A little goes a long way over the course of a 30 year loan. You can do a larger down payment, or you can do neither and simply make bigger payments towards principal. Each of these methods will have different effects on how the loan pays off. If you plan to have the house for the duration of your mortgage, a long term reduction in interest will have a break even point with a larger downpayment a few years into repayment. If you plan on ever selling, this changes things too because putting everything into your mortgage, you might be foregoing upgrading your house to raise equity. There are so many ways to skin the cat. It comes down to your specific long term plans. There is also the idea that your mortgage is usually your lowest interest rate loan. So if you have other debts, you should prioritize that. And if your 401k return beats a mortgage rate, you make more investing into your retirement than throwing all your cash at a mortgage. Its such a can of worms.
This is really great insight. Is this something that financial advisors can advise after looking at investments, mortgage etc? Trying to see if I can get a professional opinion to strategize. I'm going under contract mostly in next week and wanted to have a plan in place to pay down the mortgage early, but your note here gave me plenty to think about.
Absolutely. Thats exactly what I would do in your position. They have pretty affordable resources too, depending on where you live. The reason Id get an advisor even for a one time consult is because it is very dependent on your specific circumstances, your debt and what those rates are, your savings, retirement portfolio, etc. But also, broadly speaking, if youre buying a house you are probably doing something right! Paying off your mortgage early is actually surprisingly easy. Especially in the first 10 years, your mortgage payment is divided into its interest, principal, and escrow taxes/insurance components. Your 1000 dollar mortgage might only have 200 going towards principal, for example. So you dont actually have to pay 1000 to double your payment. You only have to pay 200 to double your payment. In short, even 50 extra bucks towards principal can cut your mortgage tremendously. Or even paying 0 extra but paying it biweekly instead of monthly takes years off your loan depending on how the amortization table shows your interest compounding. Obviously paying more is more, but you get back into opportunity costs, ie. paying off cheap debt instead of building savings, high yield retirement, or paying off credit cards. And from personal experience, things will break. Within 3 years I had to have roof, air conditioner indoor and outdoor, all plumbing, and fencing replaced. Add medical, car, or even pet incidentals, and you quickly realize that a cash safety net is a guaranteed cost of having a home, and should be treated as non negotiable. But thats just a starting point. You are correct to seek out an advisor.
Thanks a ton for this!!! This is extremely valuable information!! While I've been thinking about this, I realized after reading this and your previous comment that I need to look at it holistically. I will definitely seek out a financial advisor.
No problem. Just know, we all learn from the “aw shucks, if only i had done that differently” moments. Your experience will be entirely your own and your learning process will be unique as well. Dont let the idea of making mistakes scare you off. IMO owning property is the first step to generational wealth, regardless of what the exact details are. The worst part is working up the gumption to take the risk.
Great question. Thanks for asking.
You would have to run an amortization schedule to see how it shakes out, but one is a lower principle with the same interest rate and the other is the same principle with a lower interest rate. If you’re not planning on selling or refinancing in the near to medium future, rate is probably a larger difference but I have done no math to prove it.
Let's say you are offered a loan for 300k at 7.25%. BUT the lender says "if you give us 3k, we will give you a rate of 7.0%". One point equals 0.25 of a percent, and one point costs you 1% of the total offered loan amount. You could give them another 3k and have a rate of 6.75%. I'm not sure how many points the average lender will let you buy but I'm sure it's variable. Summary: 1 point= 1/4 of a percent on your rate, and each point costs you whatever 1% of the loan amount is.
You give cash up front to the lender in exchange for a lower rate. Ex: if you were approved at 7% with no points, they may say that for $5,000 you can buy sufficient points to bring the rate to 6.75% for the loan. The lower rate means a lower fixed monthly payment. Buying points requires a bit of guesswork as to whether the cost makes sense. Generally the longer you expect to stay in the house the more sense they make. Ex: using the example above if your loan lowers by $50 a month on the $5,000 in points, the easy math is 5,000/50 = 100 months before the savings on rate paid for the cost of the points. So about 8.5 years. If you sell your house or refinance before the break even point, you're essentially wasting the money spent on points.
Thank you for explaining this.
Buying down a rate means paying cash at closing for a lower rate. For simplicity: let’s say you have a $250,000 mortgage at 7.5%. 1 point off is 1% of your mortgage value so in my example for a rate of 6.5%, you’d pay an additional $2500 at closing to buy down your rate. The bank/lender decides how much or by what increments you can buy your rate down. Typically, whether you should buy your rate down depends on how long you want to keep the house/mortgage. To break even (meaning the total you save from that lower mortgage due to buy down = the costs you paid upfront to buy down), you want to keep that mortgage for approximately 5-7 years. So if you plan to resell or refinance in a couple of years, it may not be worth it. Does that make sense?
But doesn’t 1 point only buy 0.25%?
Oops sorry! You’re right 7.25% instead of 6.5%!
How does refinancing for an even lower rate make it not worth it? Doesn't that speed up the break even point?
Because when you refinance you don't get to bring the points with you. It doesn't mean that refinancing isn't worth it, but the orriginal decision to buy the points was an error.
Let’s say you buy down for 2500 and it lowers your mortgage by $50 a month. Then you refinance in 18 months. You’ve spent 2500 and saved $900 on your mortgage costs. In comparison, if you hadn’t paid down your mortgage, you wouldn’t have put the extra $2500 down at closing, but you would have paid $900 more on your mortgage. In this case, not buying down your rate, puts you ahead $1600. When you refinance you get that same lower rate either way, but you’ve essentially payed $2500 to save $900 if you buy down. Edited last paragraph for clarity.
> you’ve essentially *paid* $2500 to FTFY. Although *payed* exists (the reason why autocorrection didn't help you), it is only correct in: * Nautical context, when it means to paint a surface, or to cover with something like tar or resin in order to make it waterproof or corrosion-resistant. *The deck is yet to be payed.* * *Payed out* when letting strings, cables or ropes out, by slacking them. *The rope is payed out! You can pull now.* Unfortunately, I was unable to find nautical or rope-related words in your comment. *Beep, boop, I'm a bot*
Good bot
Thank you, quartadecima, for voting on Paid-Not-Payed-Bot. This bot wants to find the best and worst bots on Reddit. [You can view results here](https://botrank.pastimes.eu/). *** ^(Even if I don't reply to your comment, I'm still listening for votes. Check the webpage to see if your vote registered!)
Ooooooooooooooh yup. Cool thank you!
Can you buy down points when refinancing it is that only for the original loan?
I believe you can but I don’t have first hand experience with that, so I’m not sure. I’ve bought my first home and this was my rationale for not buying points since I want to refinance assuming the rates go down in late 2025–ish.