WOULD YOU buy your interest rate DOWN to 6.375% for $22k? With a 34 month breakeven

Question

How do you feel about a

$700k purchase price with a non owner occupied 4plex DSCR loan 3yr prepayment penalty, 10yr interest only 30yr fixed after

$560k loan amount (20% down)

7.750 par rate with no costs. monthly payment $3,616.66

Or pay $22,295 in closing costs and get a 6.375%

Monthly payment of $2,975

The monthly payment difference between the two is $641.66

And when you take $22,295 in closing costs and divide it by $641.66 that will give you 34.5 months (2.89 yrs) to break even if my math is correct

How do you guys feel about taking a lil less than 3 years to break even on $22,295

And the seller is giving me $15,500 in seller concessions

thanks for the advice guys!!

Josh Young · Answer

@Johnny McKeon

Thank you for providing the details that make this easier to think about and answer. I don't think I would add extra cash into the deal to buy down the rate, if you have extra cash I would consider doing a 25% down payment, that will usually get you a better rate/terms. I do like the idea of using the seller concessions to buy down the rate though since you have a 3 year PPP you probably aren't going to refi within 3 years, so you will hit the break even and this will give you a hedge against the risk of rates not declining (they are expected to decline, but this seems like a "free" hedge). If you do plan to refi at or around the 3 year mark when the PPP expires I would also ask your lender about a temporary rate buy down instead of / or in conjunction with a permanent buy down. In either case I probably wouldn't add extra cash into a buy down, but using seller concessions could be a smart move.

Scott Wolf · Answer

Hi Johnny, based on the info provided. We would be capped at 75% LTV, but with a 6.91% interest rate with a 5 year declining prepayment penalty.  Feel free to reach out if that's of interest.

Adam Bartomeo · Answer

The breakeven point for buying down points is about 7 years. So, if you aren't going to refi for the next 7 years then buy it down. But, chances are that you will refi in the next 3 years.

Russell Brazil · Answer

No. There is a good chance that you could refinance to a rate lower than that much sooner than 34 months out.

Johnny McKeon · Answer

@Scott Wolf

my FICO is low 800s. And with a 7.75 % interest rate and after remodeling this property  it will cash flow $1,671 after accounting for maintenance, repairs, property management, capex, earning a 6.90% cash on cash return

Jacqueline Wright · Answer

Johnny, here's a breakdown of the factors to consider when deciding whether to buy down your rate:

1. Break-Even Point

• You've calculated that it would take 34.5 months to break even, which means after almost three years, you'll start benefiting from the lower payment.
• If you're planning to hold the property long-term, say 7-10+ years, then it might be worth it to buy down the rate, as you'd have a lower payment for the remainder of the loan term, giving you more savings in the long run.

2. Interest Rate Stability

• The 6.375% rate is significantly lower than the 7.75% rate, which translates into substantial savings each month ($641.66). A 30-year fixed rate offers peace of mind knowing your payments won’t change over time.
• The longer you hold the property, the more value you'll gain from the lower interest rate, so it’s ideal for a buy-and-hold strategy.

3. Loan Structure & Payment Flexibility

• You mentioned a 10-year interest-only period. During this time, you'll only be paying the interest, which means your payments won’t reduce the loan principal. The question is how you plan to handle the loan after this period.
• With the lower rate (6.375%), your interest-only payments will be more affordable, and you'll still have the flexibility to pay more toward the principal if desired.

4. Seller Concessions

• The seller is offering $15,500 in concessions, which can significantly offset the cost of buying down the rate. If you subtract the concessions from the $22,295 buy-down cost, your out-of-pocket cost would be around $6,795.
• This makes the break-even period even shorter, as you'd only need 10.5 months to recoup that cost if you apply the seller concessions toward the rate buy-down.

5. Your Long-Term Strategy

• Consider your exit strategy. If you plan on refinancing within the next few years or selling the property, you may not reach the break-even point. In that case, keeping the higher interest rate could be the better choice since you'd avoid the upfront cost.
• However, if you're confident in holding the property for at least three years or longer, locking in the lower rate could lead to significant savings over time.

6. Market Considerations

• While current rates may fluctuate, the ability to secure 6.375% now might be a rare opportunity, especially given the overall uncertainty in interest rate markets. Securing a lower fixed rate now could hedge against future rate hikes.

Conclusion:

If your plan is to hold the property long-term, buying the rate down to 6.375% makes a lot of sense. The short break-even period and the monthly savings afterward can lead to substantial financial benefits. Plus, with the seller covering a large portion of the buy-down cost, it reduces your immediate expense, making this a very attractive option.

If you're uncertain about how long you’ll hold the property or foresee needing to refinance soon, keeping the 7.75% rate might make more sense, as you'll avoid the upfront cost entirely.

Would love to know more about your timeline and goals for this property to give more tailored advice!

Carrie Matuga · Answer

@Johnny McKeon I think I would need to know more about your deal specifics - If I were working with you, I'd want to know what is your credit? how much experience do you have? What is the DSCR on this quad? Can you afford to move to 75% LTV instead? The rate is impacted ultimately by all of these factors.

You have to go with what your gut says about when you think you would refinance and where you think rates will be in 1-3 years. If you think it's going to drop if the fed cuts 5-7 times in the next year, it might make sense to look at an ARM with a 3 year declining PPP instead. How long of a PPP is the current rate of 7.75%?

Happy to talk more. Reach out.

Denis Ponder · Answer

I don't know that I would spend this kind of money to buy down the rate.  I would take the gamble that rates will fall on their own over the next 3 years and live with the result.  Does the property cash flow at the rate before a buy down?  If so, I'm not spending my money to buy it down further.

Scott Wolf · Answer

What's your FICO? The rate seems very high.  Also, does it cashflow at the 7.750?

Erik Estrada · Answer

The buy down will highly depend on your investing strategy. If you are not planning to refinance again, then doing a buy down could make sense in the long run.

However if you do plan on refinancing again in the next 3-5 years, buying down the rate won't make any sense if it's going to take at least 3 years to break even. You must factor in the closing costs of the 2nd refinance as well to see any true savings.

I suggest shopping around and asking for the rate sheet (if the lender is willing to share). You will get a more accurate idea of what your actual interest rate is without paying any discount points. Each lender has a different spread in the DSCR world.