Choosing to buy down the mortgage is never an awful idea, but is it the best use of your money?
While we are still in the first quarter, national mortgage rates are up 0.5%. With any increase in mortgage rates, one must wonder if the time is right to buy the mortgage rate on your new loan down to control your monthly mortgage costs. Meanwhile, mortgage rates will rise as the Fed’s economic outlook becomes more optimistic.
How it works
Buying down your mortgage also known as paying points is the method used to lower your interest rate on your loan. This process will assess an additional fee in your closing costs after standard fees like appraisal, underwriting, and credit report.
For example, assume a bank is offering a loan for 4.25% with 0 points paid or 4% loan with 1 point. They have the same duration and the same fixed rate. The loan at 4% will assess a fee of 1% of the loan amount to your closing cost. For a $200,000 loan, this would be $2000.
By knowing this number, you can divide the fee by the monthly interest cost in savings. This will determine the length of time it will take for you to break-even.
Pro’s and Con’s of buying down your mortgage
This break-even time frame will help shape your decision. Are you planning to stay in the home greater than the break-even time frame? Then, buy down the mortgage. Otherwise, buying down the mortgage is a costly investment and instead, you should save the additional closing costs. Discuss your options with your mortgage loan officer to find the best combination.
An additional risk is if the interest rates drop after you have paid down the mortgage. You may choose to refinance, but that will cost additional funds and will make your break-even point even later.
Current Outlook
Should you have concern about the increase in mortgage rates? Oxford secondary home market is hot. The weekenders and students have a high demand for condos and townhouses and the supply seems to always be too low with many quick sales on the horizon. Baring a national market crash, investing in an Oxford condo or townhouse will be a great long-term investment for most qualified buyers.