First Time Home Buyers - Buying Points

[Devin Ryan]

While this may be common knowledge for many people, it's something I've been running into a lot with first time home buyers that I'm working with. Everyone is most concerned with the the number in the interest rate, and I've seen the sticker shock lead to many first time home buyers jumping to want to buy down the rate paying 1-2 points at closing.

While no one can tell you with absolute certainty what will happen with the market, it is expected to be cooling off in the coming 1-2 years and settling back at a more reasonable rate. In many of the cases, when doing the math out for the borrowers, it's shown that it will take 2+ years before the savings in your monthly payment make up for the money you paid in points. 

If the interest rate market goes at it's expected to, you'll likely be refinancing in this time (or roughly in the same timeframe) and you may have cost yourself extra money at closing that you'll never actually recoup. 

Sure, in some cases you might need to take this approach for qualifying purposes, but always make sure you're checking the savings in monthly payment versus the cost of the points to determine how long it will take to gain that return on investment. Don't just look at the rate as the end all be all for what is best for you, it very well may not be in the end. 

[Jon Puente]

Quote from @Alex Colby:

Hey Devin, thats a great point and i completely agree. In this market, more often than not when working with buyer's i mention the approach of writing in a 10k (for example) seller concession for closing costs or rate buy down in comparison to a 10k decrease in the purchase price. Given the seller nets the same amount, this approach is much more beneficial to buyers. 

More often than not buyer's opt to apply the concession to closing costs as this makes a big difference in lowering the out of pocket cash to close. I

n your opinion, with current rates is there any scenarios it would be more beneficial for buyer's to opt to buy down the rate?

Using a 2-1 or 1-0 Temporary Buy-Down is a cheat code right now using seller concessions to buy down the rate.  You get more bang for the buck AND you can still end up paying some or all of the closing costs in addition to the rate buy-down.  Permanent buy-downs can get expensive depending on the loan type and amount.  The only way I would be buying a house in this market is getting a 2-1 or 1-0 buy-down using seller concessions, and then cover most of my closing costs with the rest.  You will be able to refi later down the road as inflation decreases.