Should I buy down the rate and lower closing costs on a new construction subdivisio

Question

Hey folks I’m going to live in this home for a year or so then turn it into a rental. Financing rate is the smartest one to choose if I want to continue to purchase nhomes down the road.  Pic 1 is the interest rate paying 10 percent down and the lender giving us 6 percent in closing cost coverage.  Pic 2 has us paying 5 percent down, in that instance the lender will only cover 3 percent of the closing costs.  The third pic is ten percent down with us us buying the rate down to 4.5 percent.  The home is $203k my thoughts are that I should pocket the approximately $7k and save it for another house down the road. It would take 6.5 years for the savings to catch up. Just wondering what the smart choice would be for smart businessman. Thanks in advance. I should be able to rent the property for  $2400-2700 when I move.

Chris Igard · Answer

Great advice, hadn’t looked at it from that angle.

Nicholas Coulter · Answer

i dont see them going below 5%. In all honesty with the 5% down difference it depends on where it goes. I think of it this way. 10% down gets you 3% more in concessions. That extra 5% isnt gone, just in a deeper equity position. Based on your PP the difference you would get investing that 5% wouldnt add to more than the extra 3% of pp you get. If you can double or triple the 7k in a year why invest anything in a DP? Guessing thats the hopeful return not the guaranteed return of this deal.

Chris Igard · Answer

Nick would it be smarter to put 5 percent down, pay the $3k in closing costs and invest the money elsewhere? I’m taking a risk in the assumption that the interest rates will or may go back down sub 5 percent.  Secondly, I can invest the $7k I’m saving elsewhere and double or triple the money I would use now to purchase another home in the near future.  Just wondering if I’m over thinking it for $7k.

Nicholas Coulter · Answer

Not a huge fan of dropping that much to buy the loan down to 4.5% on a rental. If you can cashflow at todays rates why not invest that money elsewhere. If you cant, sinking money into a rate buy down seems to be a fools gold IMO. Now the question of 10% down to get an extra 3% concessions sounds good. Free money since you are putting more down on the home.