As rates continue to climb past 7.5%, the question is: Should a buyer pay upfront to save later?
In a recent blog post, I talked about the benefit of buydowns, where a seller essentially buys down the rate. This helps with the initial sticker shock and can often be the determining factor when getting a deal to the closing table.
But there’s another topic that’s been pushed to the forefront of our real estate discussion: mortgage discount points.
So, can mortgage discount points help bring buyers back into the buying pool? Let’s discuss.
One mortgage discount point equals 1% of your total loan amount. If you have a $500,000 loan, it would be $5,000 per point. If you do the math, each point will reduce your interest rate by anywhere from 0.125% to 0.25%, depending on your specific loan product, market conditions and the lender you’re using.
The mortgage discount point is paid upfront at closing, and is added to your cash-to-close total amount.
For some people, the math is mathing (as the kids say). Let’s work with these numbers from the National Real Estate Brief:
Let’s suppose you have a $400,000 30-year fixed rate mortgage at 7.25% and you don’t pay any mortgage discount points. In this scenario, principal and interest payment each month would be $2,728.87. Now let’s suppose you decide on $8,000 in points paid upfront, to lower your rate to 6.25%. Now your monthly payment is $2,462.87. That means you’ll save $266 per month, if all other circumstances are equal. (Remember to always consult with your preferred mortgage professional before making any decisions!)
However, this also means you’ve got $8,000 less in cash that you might’ve budgeted for repairs or updates on the house. Also, this assumes the buyer doesn’t refinance when rates lower, which would change the numbers yet again. And finally, buyers can ask sellers to make that financial contribution to lower costs.
You can see how it’s a balancing act between what you want to pay now and what you want to do later. It’s important to see when that break-even point happens with the mortgage discount points (divide the total paid upfront by your monthly savings) to really determine if this is a financially viable option for you. As always, consult with your lending professional before deciding on next steps. And for the rest, when it comes to buying in a challenging market, consult with an experienced agent who can help you navigate the ups and downs to accomplish your real estate goals!
If you’d like to schedule a complimentary real estate consultation to talk about your buying or selling goals as they relate to current market trends, please reach out and let’s chat!
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Andrew Manning • REALTOR® • Berkshire Hathaway HomeServices California Properties • DRE: 00941825 • 818-380-2147 • andrew@andrewmanning.com