Point Buydown on Mortgage

[David Katz]

First-time investor looking to purchase a TK property that I plan to hold long-term.  Been shopping around for some rates assuming 25% down and 30 years.  Got a quote of 5.5%, which can be 4.875% with 2 points.  I understand the general concept of rate buydown in that it effectively creates a breakeven a few years down the road where you end up saving money.  But what if you plan to pay off the loan quickly?  For example, if I intend to pay off a 30-year mortgage in 15 years, would a buydown still make sense?  Math isn't my strong suit so maybe someone can chime in.  Thanks!

[Dan H.]

Originally posted by @David Katz:

Originally posted by @Dan H.:

In general, I recommend against paying points but I still do the math to determine the "break even" point.  However, that is not a real "break even" point because today's dollars are worth more than tomorrow's dollars not only due to inflation but due to loss opportunity.

I like to minimize my investment and maximize my return.  Paying points usually is counter to my goal.  I like to buy with minimal cost and let the tenants pay down my loan.  The less I spend to acquire, the more RE I can acquire (or invest elsewhere).  

Do the math but if the break even is more than a couple/few years from now (I expect the break even will be much longer than a few years), I would choose not to pay the points.

Good luck.

 Maybe the specific numbers would help.  The home purchase price is $135,000, so with a 25% DP, the mortgage is $101,250, 30 years, and 5.5% interest rate.  If I pay 2.302 points, I can get the rate down to 4.875%.  So the cost for the 2.302 points is $2,330.78.  The difference in monthly payments with/without the 2.302 points is $39.  So the breakeven is just under 60 months, or just under 5 years ($2330.78 / 39 = 59.76).  My plan was to pay off the 30 year mortgage more in the 10-15 year range.

 I would not pay the points.  Here is some of the rationale:

1. The true payoff is not the 5 years you calculated due to inflation.  The dollars now are worth more than the dollars in the future.
2. There is no cheaper loan than conventional home loan.  I have a 800+ credit score and I would borrow all day, every day at that rate.  I could invest that money with high confidence of a return above 5.5%.
3. The cost of the loan is paid by the tenants.  I care more about my costs on the investment than what the holding costs are because the tenants pay the holding costs (assuming at least cash neutral).
4. Related to item 2 and 3, the cost is not just the cost but the loss of return if that money was used for a different investment.
5. Unless you have a 7 digit salary, it is tough to accumulate significant wealth without leverage.   Paying points is reducing leverage even if included in the loan.

Good luck