Need to lock my rate ASAP-Buy points or no?

Question

I understand the fact that my money is worth more now than in the future and will be rehabbing the property (BRRRR). I plan to cash-out-refi the property in 12 months after the rehab. Would like to get my my money back out of the deal but leave enough equity in it that it continues to cash flow.

By not paying points, my rate is 5.5% on $447k and I get $1,110 lender credit at closing.

By paying points, I pay $560 for a rate of 5.375%, or pay $2,797 for 5.25%, or pay $7,271 for 5.0%.

Paying for a rate of 5.0% doesnt make sense to me but is it worth it to pay $560 for a rate of 5.375%? I fully anticipate that rates will continue to go up and by the time I refinance the BRRRR, I could be paying 6,7,8+ %. If thats the case, I may end up keeping the original mortgage that I'm doing today and just finding a HELOC that I can access the equity in for the BRRRR.

Does it make sense to pay anything for a lower rate right now if the intention is to refinance in a year or less? If yes, then how much?

Reid Chauvin · Answer

@Karissa Sampson - Based on your plans to refi in 12 months, it's very unlikely to make sense to buy your current rate down, but here's a simple way to check: divide the total buy-down cost by the amount saved in Principal & Interest payment with the lower rate. So if it costs $560 to buy down your rate, and you'd be saving $15/month with the lower rate, you are looking at a 37 month break-even point (560/15). You'd be wasting money unless you held the loan for more than 37 months. hope that helps

Nick Lippe · Answer

Hi Karissa!

I'm a mortgage lender and I honestly do not think its worth paying points. We're in unprecedented times when it comes to interest rates but what goes up must come down.

In fact a lot of experts believe that within 12-18 months were going to see a recession which should bring the interest rates back down. I would not pay points if you plan on refinancing and taking cash.

Are you doing any type of financing right now on your home???

Salvatore Lentini · Answer

@Karissa Sampson - more importantly, it sounds like this is long term financing?  Is it amortized over 25 or 30 years?  If so there is also likely a prepay penalty.  If you refi within a year you could end up paying a 5% prepayment penalty.  Many loans have that. 5,4,3,2,1 step down % per year.  That will have a much bigger affect on loan cost than whether or not you decide to pay points. 5% on a $447K loan is $22,350.

Karissa Sampson · Answer

Wow! Thanks for the quick responses! I had thought about the fact if the fed pushes rates too high, the scale could tip into a recession and they might stop raising rates or lower them in the future to help in a recession. Too much unknown. The projections I've seen out there is that rates will continue to rise over the next 1-2 years but probably not as dramatically as this first half of 2022, then even out or even dip a little. But who knows--I haven't found a good crystal ball yet.

The only reason I wouldn't refi in 12 months would be if rates really skyrocket, in which case I may keep the original mortgage and pull a HELOC for some equity and have only the HELOC at the higher interest rate. (I just did this with my primary residence because the primary mortgage was at 2.6% and it didnt make sense to refi the whole thing to 4% at the time.) @Nick Lippe  I am currently under contract on a property that I will move into and BRRRR. Forced appreciation thru a rehab and conversion should bring the value up by $300k conservatively.

I'm just going to stick with the 5.375% rate for now. I had my numbers run for 5.375% yesterday as that was the base rate but this morning rates rose again to base of 5.5%-and well, I've had enough change for one day and like the "mental duct tape" of having a slightly lower interest rate (even if it doesn't make a ton of sense, I could care less about that $560, especially if it makes me feel better to be at 5.375% rather than 5.5% in this moment, just based on emotions, haha)

Of note, the property I have under contract requires some major renovations in order to get it to the point that its rentable so I will have carrying costs to the tune of $3k/month to pay for the mortgage until its rentable. I have $190k in cash available to me for carrying costs and renovations ($50k is a loan from family member that I would prefer not to need, still $140k of my own cash) My scope of work for the reno is $50k.

Thanks again to those who commented! We are out here in Colorado in a crazy in-demand market trying out a new strategy that I believe is going to be very high reward. With higher reward often comes more risk, I'm just trying to keep some balance early on in my investment career.

Kushaal Malde · Answer

There is a tendency to want to buy the rate down in a high interest rate environment but borrowers should be looking at the pay-back period to break even. Often, it will calculate to needing to hold the loan for 3+ years. When the average life of a loan is constantly shrinking, from 5-7 years to more recently 18-36 months even, lenders are charging more points up front at the closing table to collect those fees that they would be missing if their loan is sold or refinanced within 18-36 months.

Realizing this, it is seldom the case a borrower should pay points for that lower interest rate especially if they are not planning to be holding the loan beyond the break even point. So, calculate your break even points!

Look at the trend from Freddie mac on purchases since 1971. Pts are going up as the rates over time are trending down (we're in a blip)

Rodney Sums · Answer

The common way to decide if you should buy points and how much is to calculate how many months it'll take to recoup the cash you gave up based in how many dollars lower your payment will be.

Generic example: if you spend $120 on points and it reduces your monthly payment by $10 it'll take a year to get your cash back and experience the savings.

The risk as others mentioned is you buy points down to a rate that would be available later. For example you spend thousands to get a rate of 5% then a year or te later rates are below 5%. The same risk is present for not buying points. You could have bought a lower rate today and years from now they only go up.

I you're dead set on refinancing a year from now it likely isn't worthwhile for you to give up that cash.

Dave Skow · Answer

@Karissa Sampson- thanks - easy  choice - take the 5.5%  option - the difference in payment to the 5.375%  is tiny and the cost differnce is $1670 ...you  wont make up  1670  via the payment  savings in 12 months  when you plan to  refinance it

Karissa Sampson · Answer

The break even point is around 3 years and its possible I will hold this mortgage for 3 years. Hopefully not, but there's a decent chance so I went and threw $560 at it for pts. Maybe I'll look back on it and decide I should not have, but its an inexpensive lesson. Hopefully the more I learn for free (ie: forum discussions just like this), the better I can avoid having to pay for lessons in the future.

Karissa Sampson · Answer

I've shopped around to 8 lenders currently. I'll shop around again when it comes time to refi the property. While my goal is to refi in 12 months, it could be longer. Like I mentioned before, a lot depends on the actual time it takes to renovate the property and on the market conditions at the time I am ready to refinance. It might end up taking a long time to renovate the property or the rates may be terrible at the time I am ready. I may end up choosing to wait longer to refinance it (years even). If the renovation goes fast and rates don't rise rapidly, I may refi asap. Its all TBD.

I have another $220k in equity in another property (well more than that but that's what I can access for the LTV. It was my first attempt at a BRRRR and I forgot the importance of refinancing while its still my primary residence and just decided to move on to the next property-oops, lesson learned). So, if this new property needs to wait a while to refi, I have options. We are currently working on getting that other property's equity out now. My partner and I are both on the mortgage and its relationship to me is currently an investment property so a cash out refi was nearly impossible for me to find and I had two consecutive attempts to HELOC it, but then they both fell through (underwriting's personal dislike for my setup-turns out they don't like you BRRRR'ing even if it is legal, and some overlay issues that the loan officer was oblivious to which wasted everyone's time) Its still my partner's primary residence but he was laid off from his job for a while during COVID19 and is just short of having the 2 years of income and tax returns that everyone wants to see for him to do a primary residence cash out refi. Speaking of, what kind of rate and term difference is there for a cash-out-refi for a primary residence vs. investment property? Does anyone do cashout refi on investment properties? I found one (cant remember their name now) who did it but it was either an issue with the $ amount of cash out that I wanted (not even the LTV, just the actual jumbo sized $ I wanted) and/or the term of the loan was incredibly short which would have eliminated all cash flow from the property.

Karissa Sampson · Answer

Its a fixed-rate residential primary residence conventional mortgage amortized over 30 years with a local credit union. I just checked with the loan officer and was told there is no prepayment penalty if I refinance it.

Need to lock my rate ASAP-Buy points or no?

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