My client came to me yesterday and ask me the above question. They have $20,000 in savings and want to keep their monthly payments below $750, and wanted to know how much they can afford. They wondered, is it better to put all that money for downpayment or to buy down the interest rate?
It happens that my clients have been approved for a special NO MONEY DOWN loan with a 4.25% fixed-interest rate for 30 years with no prepayment penalties. A very sweet deal.
They want to buy at least half an acre of land outside Harris County which will give them a 2% tax rate for their property taxes.
At 4.25% interest rate, if they buy a $105,000 house, their bank note would be $516, the taxes $183, and the insurance $50 which would give them a monthly payment of $749. Exactly what they are looking for.
However, if they put $20,000 towards their downpayment, their bank note would be reduced to $418.15 which would give them a monthly payment of $651. They would be saving $98 a month. Not bad
Now, if we use part of the savings to buy down their interest rate to 1.25%; that is, we buy 12 points, and each point is equal to 1 % of the loan, we estimated that they can buy a $140,000 home which would give them a bank note of $467, taxes equal to $233, and insurance equal to $60 which would give them a monthly payment of $760. In this case, they would have to pay $16,800 to buy down 3% of interest rate. They intend to live in this property for a very long time.
We can clearly see that my clients are better off by buying down the interest rate to 1.25% as this helps them to buy the best house they can afford and with an incredible interest rate. As you can see, Real Estate is all about the interest rate.
Now it is very rare to find a bank that would allow to do that but my clients are in top national program and they are taking advantage of every bit of it.
If you have more questions, please do not hesitate to Email me or contact me at 832-607-0149 for more information.
As a By Referral Only®, and C.D.P.E, REALTOR® , I am committed to providing such extraordinary service and expertise that you will gladly refer your friends, family and acquaintances. With your help I am able to build strong business relationships one person at a time.
