The Advantages and Disadvantages of Buying Down Your Mortgage Interest Rate

PHOENIX (3TV/CBS 5) – A few months ago, homes in the Phoenix area would have had heaps of offers within days. Today, sellers are lowering prices and buyers are negotiating concessions, as the average mortgage interest rate for a 30-year mortgage has risen above seven percent.

“Obviously the market has completely changed,” said JR Samsing, vice president of Home loan offers. “With interest rates more than doubling since the start of the year, markets have slowed, there are more properties on the market, which is great for buyers, and buyers have a lot more weight.” He says buyers are increasingly asking sellers to cover the cost of redeeming points to get a reduced interest rate.

“If you’re going to negotiate a price reduction, let’s say it’s $10,000 off a house, well, $10,000 is only about $50 or $60 a month in your mortgage payment,” Samsing said. . “But if you take that same $10,000 and apply it to an interest rate buyout, you’re probably looking at savings of several hundred dollars a month.” It’s a good deal if the seller covers this cost. But for buyers buying their own points, there’s a little more math to do.

“The bank wants to get their money, whether they get it from you in the long run with a higher interest rate or get it up front, but they cut your interest rate as soon as departure,” said David Chang, a mortgage expert. for Ascension.

Here’s how it works: One point equals one percent of the loan amount. Typically, one point will reduce the interest rate by 0.25%. “So that means two points for a $500,000 house would cost you $10,000 and you would lower your rate by 5% to 4.5%.”

This is why buyers need to do a break-even analysis. “Am I going to stay in this house long enough to get this money back?” If you’re going to stay in a house for 30 years, it’s definitely worth it,” Chang said. “But the break-even point for a lot of them is around five to eight years, so if you’re not going to be in a house longer than that, it doesn’t make sense to pay the points back. ”

Buying points is tax deductible, like any other mortgage interest you pay, so you also need to consider the impact this will have on your taxes.

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