I’m in a great position to buy my dad’s house with my fiancé and have a question about buying down mortgage rates. The house has five bedrooms, 2.5 bathrooms, and was built in 1993. It’s just the two of us now, but we’re planning for kids after our wedding and want a home we won’t outgrow quickly. My dad’s offering 20% gifted equity on the house, valued at 520k, but sold to us for 416k, which means no down payment and no PMI for us. I’m considering buying down points but unsure how many. Is one point really just 0.25% off the rate? I’ve found mixed info online. Would love some insight, especially as this is my first home purchase!
Don’t forget the full amount of points you buy can be deducted from your taxes the year you purchase them.
Presley said:
Don’t forget the full amount of points you buy can be deducted from your taxes the year you purchase them.
Really? That’s great news since I’m self-employed and could use the tax write-off. Do you think it’s a good move then, considering that money would otherwise go to taxes?
With 20% equity, you won’t need mortgage insurance. If interest rates were below 6% and you were staying long term or converting this into a rental, buying points might make sense. But with rates at a 25+ year high and expected to drop, spending $4,160 for a .25% rate reduction might not be wise if you plan to refinance before reaching the breakeven point. It’s best to ask your lender about your breakeven period and consider how likely you are to refinance within that time.
@Tobin
I regret not being in this situation five years ago. I’m not very hopeful about seeing low rates again soon.
Shan said:
@Tobin
I regret not being in this situation five years ago. I’m not very hopeful about seeing low rates again soon.
I once refinanced to a 5% rate on a 30-year mortgage and thought rates couldn’t go lower. But things can change, so it’s hard to predict.
Shan said:
@Tobin
I regret not being in this situation five years ago. I’m not very hopeful about seeing low rates again soon.
You might find it helpful to consider whether the tax deductibility of buying down the rate makes it a more attractive option now that you’re itemizing as a self-employed individual.
There are two types of buy-downs: permanent and temporary. A permanent buy-down lets you purchase the maximum points allowed, with 1 point reducing the rate by .25%. A temporary buy-down, like the 3-2-1 option, must be paid by the seller or lender. It decreases by 3% in the first year, 2% in the second, and 1% in the third, then reverts to the original rate. If rates drop and you refinance, any unused funds from the temporary buy-down can be applied to the refinance. It’s wise to have your loan officer compare both options to see what’s best for your short and long-term needs.
What’s your interest rate before considering any points? Understanding your breakeven point—how long it takes to recover the cost of the buy-down—if you’re planning to stay in the house long-term and prefer not to refinance when rates fall could make the buy-down a worthwhile option.