Why Permanent Rate Buydowns Might Not Be Worth It in Today’s Market I hope you had a wonderful long weekend! I know, I worked too! Lately, I’ve had many buyers asking about permanent rate buydowns, often because they can leverage seller credits to lower their interest rates. I’ve mentioned before that I’m not a fan of this strategy, and honestly, I hate it in this market! Like many in the industry, I believe interest rates will drop in the next 1-2 years - hopefully sooner and more dramatically. When advising buyers or agents, I always emphasize the breakeven point of paying points versus avoiding them, ensuring clients make informed decisions. The Case Against Rate Buydowns Paying points to buy down a rate is appealing, especially with a seller offering credits (e.g., $25,000 on a $1 million home). However, when rates are expected to decline, locking into a lower rate now could mean missing out on bigger savings later through refinancing. For buyers with options, paying 2 points (even if the seller covers it) to make a payment look better isn’t always smart. Our goal is to do what’s best for our clients, and most will appreciate understanding the numbers. A Practical Example Let's consider a buyer putting 20% down on a $1 million home with the following rates: Rate Points Principal & Interest Total Monthly Payment (Taxes + Insurance) Monthly Savings vs. 6.75% Breakeven (Months) 6.75% 0 $5,173.54 $6,590.21 – – 6.50% 1 ($8,000) $5,056.31 $6,472.98 $117.23 68 6.25% 2 ($16,000) $4,939.74 $6,356.41 $233.80 68 Now, compare this to negotiating the price down to $984,000 at the 6.75% rate: Purchase Price Loan Amount Principal & Interest Total Monthly Payment (Taxes + Insurance) Savings vs. $1M at 6.75% Breakeven $984,000 $787,200 $5,088.47 $6,482.77 $107.44 At Closing ($16,000) Notes: Taxes are 1.25% ($1,041.67 for $1M, $1,025.00 for $984K), and insurance is 0.45% ($375.00 for $1M, $369.30 for $984K) of the purchase price. Why This Matters The breakeven for the 2-point buydown is 68 months if the seller covers the $16,000 cost, but if we deduct that $16,000 from the purchase price (effectively negotiating to $984,000) and the buyer pays it out-of-pocket, the true breakeven extends to 126 months! This is because the net monthly cost difference between $1M at 6.25% ($6,356.41) and $984K at 6.75% ($6,482.77) is $126.36 higher with the buydown when adjusted for the price drop. Over 126 months, the buyer recoups the $16,000, but this is over 10 years - far too long, given the expected rate drops in 1-2 years. Refinancing could offer greater savings, and negotiating a lower price preserves flexibility without upfront costs. The exception is if a buyer can’t qualify for the higher rate, but for those with options, avoiding points is smarter. Our goal is to do right by our clients! If you’re an agent or potential buyer considering this, think twice before paying $16,000 for a buydown that takes 126 months to break even when a price negotiation could save you immediately. Please let me know if you have any questions or if a client needs my guidance. I’m just a call, text, or email away. 📞 Cell: 661-714-6258 TEXT: 661-714-6258 📞 Office: 661-260-2970 ext. 2222 📞 Direct Line: 661-291-2222 📧 Email: Mike@AugustaFinancial.com But wait, there’s more… Interest Rates Rates are a little better today, but we are still a ways away from where we were just a week ago. Let's hope we get some momentum and get this baby back in line! We love doing loans on Non-warrantable condos! We offer 12-day escrows for pre-approved buyers - Conventional/FHA/Jumbo/Bridge loans. We provide loans in all 50 states, so call me with anything you need. Government loans (FHA/VA/USDA) are in the high 5’s and low 6’s. Conventional loans up to $806,500 are in the mid to high 6s. High Balance Loans from $806,501 to $1,209,750 are also in the high 6’s and low 7's. Jumbo loans above $1,209,750 are in the 6’s and 7’s. Bank statement loans are available with 10% down again, with larger down payments in the 6’s ++. Profit and Loss Statement loans require 20% down - no bank statements needed, only a profit and loss statement! 0 down loans are available in the high 6s, with a minimum credit score of 620, up to $1,300,000. Private Money lenders offer Hard Money Loans with 35% down. No Ratio Loans require 30% down. DSCR (Debt Service Coverage Ratio) loans are available with as little as 15% down. Bridge Loans typically have an interest rate of 7.99% with limited fees, helping you get where you need to go! 3/2/1 Buydowns, 2/1 Buydowns, and 1/0 Buydowns are available at great starting rates! Please note that interest rates are subject to change without notice, and the information above reflects LA County Loan Limits. Condos: **Good News for Condos:** – Nothing new! **Bad News for Condos*** American Beauty Gardens is having an issue with Insurance now. They were at a 19% delinquency rate and now the Insurance will make it 10% down instead of 5% like we could in the past! Nothing this week! The full state of California naughty list has been added to MikeMeena.com! See the link below: https://mikemeena.com/non-warrantable-condos/ Let me know if you hear anything new about condos or townhouses. I am available every day if you need anything. 📞 Cell: 661-714-6258 TEXT: 661-714-6258 📞 Office: 661-260-2970 ext. 2222 📞 Direct Line: 661-291-2222 📧 Email: Mike@AugustaFinancial.com Have a great day, and an even better tomorrow! Please call me when you have a client who needs to borrow! Mike Meena President | Loan Officer Click to Call or Text: (661) 714-6258 This entry has 0 replies Comments are closed.
