Navigating Mortgage Choices: Buying Down Your Rate vs. Raising Your Down Payment

Embarking on your journey towards securing a mortgage comes with a myriad of decisions to make. One pivotal question is whether to reduce your monthly payments by buying down your interest rate or increasing your down payment. Each of these options necessitates an upfront out-of-pocket payment and can diminish your monthly mortgage expenditure. However, their long-term financial repercussions differ significantly. Let's dissect these two alternatives - buying down your rate versus augmenting your down payment - and gauge which one aligns best with your future financial aspirations.

Deciphering the Concept of Buying Down Rate with Discount Points

Discount points or mortgage points are a form of prepayment for interest, enabling a lower rate and subsequent monthly payments. Essentially, by purchasing points, you "buy down" your mortgage rate. Though it means an elevated upfront cost, the reward is a reduced interest rate over the lifespan of the loan. This approach suits those planning to maintain their loan for an extended period.

Each point equals one percent of your loan sum, hence, a point on a $100,000 loan equals $1,000. You can even opt to purchase multiple points to further decrease your rate, subject to your financial capabilities. Notably, buying points for a lower interest rate won't augment your home equity, and you only benefit from your points if you stay in the house long enough to capitalize on the reduced payments. Your Loan Estimate will specify the available points for purchase, closing costs, and anticipated tax and insurance costs.

Boosting Your Down Payment

Your down payment represents the upfront payment towards your new home's price, which is then subtracted from your loan balance and constitutes your initial equity in the property. Depending on your loan scheme, you need to provide varying upfront cash amounts.

CrossCountry Mortgage provides an array of low or zero down payment mortgage options such as:

• FHA Loans: Minimum 3.5% down payment
• Conventional Loans (with PMI): Minimum 3% down payment
• VA Loans: 100% financing
• USDA Loan*: 100% financing
• Jumbo Loan: Minimum 15% down payment for primary residence (with no PMI)

Boosting your down payment reduces the loan amount, thereby potentially reducing your monthly payments. You should be able to recuperate your down payment upon selling your property, provided it retains its value. Remember, when making an offer on a house, the entire down payment isn't required upfront; however, an earnest money deposit may be necessary.

Decoding the Best Option to Lower Monthly Mortgage Payments

There is no one-size-fits-all answer to this dilemma. The optimal choice relies heavily on your unique financial circumstances and long-term financial strategy. Unlike down payments, money invested in mortgage points cannot be recovered, hence you need to ensure the benefits outweigh the costs if you opt for buying down your rate. Potential advantages include:

• Decreased monthly payments, providing additional cash flow in future years
• Lowered debt-to-income ratio (DTI)
• Possible tax benefits from funds invested in points

If you possess sufficient cash and plan to remain in your home long-term, buying down your rate is worth contemplating. However, many people avoid upfront point purchase considering the opportunity to refinance in the future.

Understanding Your Break-Even Point

To ascertain how long it will take to recover the costs of buying points, divide the cost of points by the monthly savings. The result indicates the period needed for your monthly savings to equate the cost of the points purchased. This calculation may vary due to the fluctuating market conditions.

Furthermore, contemplate potential tax impacts, the feasibility of refinancing at an improved rate in the near future, and alternative uses of your money before making a decision.

Other Factors to Consider

While a lower interest rate is attractive, redirecting funds from your down payment could result in mortgage insurance and possibly larger monthly payments than anticipated. Before making a decision, scrutinize your numbers and ensure your decision aligns with your long-term financial objectives. Understand your loan's intricacies before you commit to either buying down your rate or increasing your down payment.

For instance, points towards an adjustable-rate mortgage (ARM) only discount the loan's interest during the initial fixed-rate period. If your break-even point extends beyond this period, buying down your rate might not be economically viable.

Ready to embark on your homeownership journey? For inquiries about your loan or reducing monthly mortgage payments, reach out to your local Mortgage Advisor today, or explore additional resources on our blog.