$10k for .5% off in interest?

Seeking Advice
1

I’m closing on a new build that began in September. Rates have risen, and my builder offered a choice between a $10k point buy down or a price reduction. My loan officer said the $10k buys down the rate by .5%, from 6% to 5.5% on an FHA loan. I thought the reduction would be closer to 1%. Is this normal? I’m a first-time homebuyer, so I’m new to this.

2

What is your loan amount?

3

Vail said:
What is your loan amount?

It’s about $400,000.

4

Bo said:
Each point typically lowers the rate by .25%, and one point costs 1% of the loan amount.

Very helpful, thank you! I didn’t know that.

5

That’s a bit high. For a $500k house, it might be more typical. For your loan amount, you’re looking at about $125 savings per month, which would take about 5.5 years to break even if you never bought the points. Total interest savings should also be considered if you decide to buy down.

6

Could you clarify how you’ve been engaged since September but are facing such a rate? Are you using the builder’s lender? When is your closing scheduled? $10,000 for .5% seems steep unless your loan amount is around $1 million. Do you have a loan estimate?

7

@Luca
I signed the purchase contract then, and the loan terms didn’t allow a rate lock until 30 days before settlement. I’m using a lender recommended by the builder for additional incentives. I opted for the price reduction because the rate buy-down didn’t seem worth it.

8

@Sawyer
Taking the rate reduction would save you about $40k over a 30-year loan term.

9

Fynn said:
@Sawyer
Taking the rate reduction would save you about $40k over a 30-year loan term.

I considered that, but the lender offers one no-fee refinance within five years. There’s also a possibility to adjust the rate if it drops in the next few weeks before settlement.

10

@Sawyer
What are your total closing costs, and when is your closing? Are you purchasing a completed build?

11

Luca said:
@Sawyer
What are your total closing costs, and when is your closing? Are you purchasing a completed build?

Closing costs are about $30k, closing in about 20 days. The build started after we signed and selected the lot.

12

@Sawyer
Is your down payment 3.5% of the loan?

13

Luca said:
@Sawyer
Is your down payment 3.5% of the loan?

Yes, that’s correct.