Why Buying Down Your Interest Rate Makes a Lot of Sense
Summary
This article explains how hosts can potentially lower their mortgage interest rates through "rate buydowns." It details both temporary and permanent buydown options, emphasizing the potential for better cash flow and debt-to-income optimization, especially when leveraging seller or builder concessions in the financing process.
Key Insights
- •Temporary buydowns (3-2-1, 2-1, 1-0) offer lower rates in the initial years, potentially boosting early cash flow. Permanent buydowns provide a lower rate for the loan's life, helping DTI for future loans.
- •In a scenario with no buydown and a loan of $300,000 at a 6.875% rate, the monthly principal and interest payment is approximately $1,971. A temporary 2-1 buydown funded by concessions can lower the effective rate to 4.875% in year 1 and 5.875% in year 2, resulting in significant savings.
Action Items
- ✓Consider exploring rate buydown options, especially if you're buying a new build where builder concessions might be available to fund them. If not, calculate the breakeven to see if the permanent rate buydown is better.Effort: mediumImpact: medium
Tools & Resources
- →Rent To Retirement: Rent To Retirement helps investors capture these opportunities.
Common Mistakes
- ⚠Underwrite deals at the full note rate. If it doesn’t cash flow at the full note rate, don’t buy it.
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