Put more $ down or towards buying down the rate?

Question

This will be my first home purchase. It is a duplex that I intend to own long term as primary residence and rental. My parents want to gift my $5,000 towards the house and want to know how it will be most beneficial to me. I am putting 5% down, which is about 14k. My rate is locked at 5.875%, and if the money is put towards buying down the rate, it will bring it down to 5.375%, which will save me ~$85 per month whereas putting the $ towards downpayment lowers it $30/month. My lender says I can refi down the line when rates drop so it may be better to put more down. I guess the last option would be putting the money towards closing costs since that is money upfront. Any recommendations? Thank you

Matthew Kwan · Answer

Yeah if you are planning in the long run, I would do more money down. If you are only saving $85/month and assuming you are planning to refi hopefully for a lower rate withing 2 years so that's 24 months, it will only save you $2040 total. However, the down payment is putting towards your principal.

@Carlos Valencia @Albert Bui

Adam Laurenzo · Answer

Just closed on a property this week and asked ourselves a similar question. Did not buy the rate down in the end; we are expecting to refinance before the end if the year and get a lower one anyways.

Eliott Elias · Answer

Put more down on the property.

Simon Ashbaugh · Answer

How much more would you pay/put down? I'd rather spent an extra 30-80/month and have a few thousand liquid, personally.

Sasha Mohammed · Answer

@Taylor Robertson the recuperation calculation up there ^^ from @Reid Chauvin is fantastic for seeing cost vs benefit tangibly.

Everyone's strategy and goal is different. Simplified:

IF your goal is to maximize your initial equity, and your thought is rates are going to come down in the next year or two, it might make more sense to put the money into down payment instead.

IF your goal is to keep the monthly payment as low as possible so you maximize your CASH FLOW, it might make more sense to put the money into buying down the rate.

A refinance is always an option if/when rates come down, but also not a guarantee. Many factors could prevent you from refinancing as planned/ expected, so be open to it, but also don't bank on it.

Also, there are so many rabbit-holes to go down here. What if the monthly savings don't really matter to you and you care more about bigger-picture investment strategy? what if you took these savings... $30-ish a month (put the $5k toward down)$83-ish a month (put the $5k toward rate buy-down)...and put those savings back into the monthly payment toward principal? What if you did the rate buy-down, pocketed the $30-ish savings, and applied the $52-ish a month (delta between the two) back toward principal?Even these small-ish numbers will make huge differences over time. (I did the math, but its too much for a BP post. Happy to PM it to you if you'd like)

Typically, the bigger the loan balance, and the longer the time horizon, the more a rate buy-down makes sense.

Personally, I bought down my rate. But there is no one-size fits all :)

Taylor Robertson · Answer

Thank you all for the helpful responses. The purchase price is $276k and it’s a conventional FTHB loan. I do plan to hold long term, likely moving out after a year or two to rent out both sides and purchasing another property.

Reid Chauvin · Answer

Hi @Taylor Robertson - There are a few things to sort through here as to what your best option is. Doing some quick math, buying down the rate for $5,000, saving you $85/month in mortgage pmt, will take about 59 months to actually start saving you money (5,000/85 = 58.8).

I'm assuming this is an FHA loan if you are only putting 5% down on a duplex. You are going to have mortgage insurance for the life of the loan if this is the case, and that MI is not cheap...If you plan to hold this property for the long haul, odds are you will want to get rid of that mortgage insurance one way or another. Refinancing in a few years is your most likely route.

I'm not sure if I would increase my down payment amount with the $5k, would probably just use it to help cover the upfront costs that way you have some reserves for furniture, repairs, etc.

Griffin Pratt · Answer

First of all, congratulations on your first rental property! Also, super awesome of your parents to help you out on the first prop. In order to answer your question I'd need to understand your longer-term plan. If you anticipate refinancing to a lower rate soon, say 3-5yr, I'd put it toward the down payment as you'll want more equity in the home when you refi, you'll likely spend more than 5k on refi costs, and your interest rate will be lower anyways. If you don't plan to refi or are looking at a longer timeline before you do (5yr+) it may make more sense to buydown the rate and give yourself an extra $85 of cashflow that can serve as your reserves fund.

Regardless both options only stand to benefit you, only question is which better fits into YOUR plan.

Mike Singer · Answer

You'll probably refi that loan later this year with rates expected to go down. I'd take the par rate and save the equity. Buy it down when rates aren't so high and you plan to be in the loan long term.

Put more $ down or towards buying down the rate?

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