Why is the PITI different when equal amount applied Principle & Interest?

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• #71890
lazysusan
Participant

I was wondering if anyone has insight on this.

I inputted the same amount in principle buy down and interest buy down and the PITI is different.

My question is that, I thought that principle buy down would yield me a lower PITI but interest buy down yielded me a lower PITI.

My logic would say that buy down principle would mean less PITI because there is less total to pay off. But I feel that I a missing a calculation analysis of this situation.

Can someone explain why that is?

#71891
Damien Smith
Participant

Greetings @lazysusan,

I hope this message finds you doing well! It has a lot to do with the interest you are paying over time. It is always best with NACA to put the max amount allowed towards interest buy down and the remainder towards principle buydown and you can never go wrong. This is the great advantage that many people don’t take advantage of when using NACA. It has to do with more complex approaches such as compound interest so just know what you put in the NACA calculator was correct. I hope this helps!

Damien Smith
Online Communications, NACA

#71892
Nelsont
Member

Interest is compounded and accrues daily. Every 1% in interest has the same effect of about 10% in principle. Look up sample loan amortization schedules.

If you have a \$100000 house and put 10000 down you have a \$90000 loan. Interest on a \$90000 might accrue at \$10 per day. That same interest on a \$100000 loan might accrue at \$11 per day.

But if you put that \$10000 down payment into buy down then you still have a \$100000 loan but it’s only accruing interest at say \$6 per day.

FYI this is why if you make a \$1000 payment you will owe 99000 today but your next billing statement will say you owe 99800 or so.

#71893
TTrumble
Member

Hello lazysusan,

The bottom line is that the same amount of money applied to interest rate buy down in the NACA program will always be about three-to-five times time more effective in reducing payment amount (and total interest paid) than a simple principal buy down (aka, down payment).

People very frequently don’t realize just how much interest they pay on a loan, both at the beginning of the loan and over time.

Over thirty years, using today’s rate (2.625%) on a thirty year loan of \$200,000, five points (\$10,000) of buy down will reduce the interest rate to 1.375%. That’s \$678.31 in principal and interest payment each month and over the life of the loan you will pay at total of \$44,191 in interest.

Using that same \$10,000 for principal reduction instead, you have a \$190,000 loan at 2.625% interest. Principal and interest payment each month is 763.14 and a total of \$84,729 in interest over the life of the loan.

Therefore, using the interest rate buy down function, you save \$84.83 per month and a total of \$40,538 in interest compared to using the same funds for the down payment.

(Taxes and insurance have not been factored in since they are the same in both examples.)

Very simply, buying down the interest rate is ALWAYS the better way to go.

Tim Trumble
Online Operations, NACA

• This reply was modified 2 weeks ago by TTrumble.
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