August 23, 2019 at 6:25 pm #58660RichStalwart15Member
NACA strongly urges people to buy down their interest rate.They do list the pros & cons in the book. However, I don’t think the average person really understands if its mathematically rational to do so.
I have found an easy tool that lets you know exactly how many years it would take to break even based on how many points you bought down. From that point is when you really will reap the benefits. I’m buying my first home. The average first-time buyer stays in their home for about 6 years. I plan to stay in my first home for about 6 years, but I cant say exactly how long I will be there. After running the numbers I found it would take 9.3 years if I bought down .25 percent by contributing 1%. Thus, I came to the conclusion that a principal buy down is more rational (instant equity)!
Everyone’s situation is different. Play with this tool and see if which is better for you principal or interest rate buy down. 9 times out of 10 NACA will suggest/mention the interest rate buy down. I have never heard a counselor suggest a principal buy down other than the purchase workshop.August 23, 2019 at 6:39 pm #58663NelsontMember
You are exactly right. Many people don’t realize this. It helps to buy down the interest rate in order to get a really low payment which would give you a really low DTI and the ability to pay off your loan earlier and easier OR if you want to get a house that is much more expensive than you would normally be able to afford. Otherwise buying just a couple of points may not make sense.
You probably won’t hear a counselor suggest principle buy down because you can’t contribute to principle (which would be down payment) unless or until you already max out your interest rate buy down and still have funds you want or need to use.
August 24, 2019 at 12:46 pm #58673RichStalwart15Member
- This reply was modified 2 years, 5 months ago by Nelsont.
I believe you can do a principal reduction as long as you have enough in savings after. It was on this sheet my counselor was filling out before Credit Access.
I also pulled this from pg 3 of the purchase workbook
Information You Should Consider Before Buying-Down Interest Rate If you have funds available, there are a number of ways in which you can use them: you could keep them as a savings fund; use them as a principal payment (i.e. down payment) to lower the loan amount and the corresponding Monthly Mortgage Payment, or use them as discount points to permanently reduce your interest rate and the Monthly Mortgage Payment. You should consider the information below in making this decision as it applies to your circumstances. You Are Not Required to Pay Buy-Down Discount Points – The payment of discount points is not required. It is your decision to pay or not pay discount points to permanently lower your interest rate and by how much. The NACA Buy-down may be the most effective way to be approved for an affordable payment for a property that exceeds the payment you qualified for. This increase in cost could occur due to higher property taxes, Home Owner’s Association fees, and/or an interest rate change even when the loan amount is the same.
I wonder sometimes if there is an incentive for counselors/underwrites to push IR buy-down. Banks are smart, they know that most people dont stay in the same home for 30years, so they love to collect as much interest up front, because people refinance/sell all the time. Thats why in the first five years of the mortgage about only about 45% of your payments actually went to principal.August 24, 2019 at 2:05 pm #58674NelsontMember
I think we are saying the same thing in different ways. You must buy down your interest rate to the max before you can apply any funds to principle. In my opinion principle buy down is not mentioned much because it requires 7 to 9 points or more of interest rate buy down which in many cases may be 30-50k.
In my area most of the clients can’t afford any available property on their own unless they get a fixer upper which would require funds they don’t have. So going in with a spouse houses will become affordable for the majority of clients but still on the fringe which makes the interest rate buy down attractive and probably why at least in my area it’s pushed.
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