Frequently Asked Questions
"Should I Buy Down My Interest Rate?"
First of all, it makes no difference to us whether you buy-down an interest rate or elect a no cost loan. Our job is to assist you in making the best possible decision with respect to selecting a type of loan as well as the interest rate. An excellent starting point is to attempt to estimate how long you anticipate living in the property? If the answer to that question is less than eight years then under no circumstance should you buy down an interest rate since it takes approximately eight years to recoup the cost of the buy-down.
This can best be illustrated using the following example.
While there is no exact linear relationship between interest rate and cost, if we had to make the best guess at a linear relationship between the two it would be an 1/8% in rate costs three-quarter point. This can best be shown by viewing the following abbreviated illustration of a wholesale rate sheet.
Continuing this example let’s compare a $200,000 loan amount with an interest rate of 7.00% and one with a rate of 6.875% (6.875% would cost 3/4 point or $1,500 more than 7.000%).
Given the additional cost of $1,500 to receive the lower rate and the monthly saving of $16.74, the simple payback period would be approximately 89.6 months or 7.5 years ($1,500 / $16.74 = 89.6 mos.). Here, you need to understand the above calculation does not take into consideration the time value of the $1,500 cost for the lower rate. In essence if you elect to pay the $1,500, you lose the ability to invest those dollars, increasing the break even period.