[quote=asianautica][quote=cooperthedog]
True, but the opportunity cost of the few thousand also must be taken into account.
If your rate of return is higher from investing the buydown money, then you will “save” less over the life of the loan vs. investing it.
With rates at 5%, do you expect your investments to return more or less then that over the next 30 years? Another way to look at it is; would you be willing to invest in a 30 year bond at 5%, or would you be worried about future inflation or better returns from different asset classes?
I’m of the opinion that with fixed rates this low, I want to use as much of other peoples money as possible. [/quote]
Please run your numbers with your assumption. Use a $500k house w/ 20% down as the example. 5.25% w/ 3900 in fees and 6.25% w/ 0 fees. Let me know what you come up with.
carlsbadworker, what kind of opportunity cost do you think you’ll lose with $3900 over 30 years. Please run your # and prove me wrong. I’ve came up w/ the numbers in my example.
With 5.25% rate, you’d pay $395k in interest over 30 years. with 6.25% rate, you’d pay $484k in interest over 30 years.[/quote]
Asianautica – there are two separate items:
1) Whether no cost loans are the best choice dependent on time frame.
2) Whether buying down a loan by paying points is a better use of capital then investing it.
As to the first, no cost loans will *always* be more expensive when fully amoritized, since the APR is higher. The lender requires a premium for this “service”. The point I was trying to make is that your time horizon determines the true APR (what you actually paid over the life of the loan). Using your scenario, you would be far better paying $3900 to get a full point (~20%) rate reduction over 30 years, and with a spread that wide, your breakeven would be only one year. In your case, the lender is charging a fortune for a no cost loan. A lender *should* adjust the no cost loan’s rate to factor in the loan amount (higher balances require less premium) as well as the % diff (a point means alot more at 5% then 7%), of course many lenders will NOT adjust for these factors and happily pocket the extra premium…
As to the second issue of opportunity cost, in your scenario above, your 4k buys you a full 20% rate reduction (full point from 6.25% to 5.25%), which I wouldn’t attribute to a bargain point buydown, but rather a very pricey “no-cost” loan (which may be the norm now). Either way, you would save a substantial 90k and you would need to make > 13% ROI if you invested the 4k to just breakeven. If your scenario used a more typical rate buydown (eg 1 point equating to a 5% (1/4pt) rate reduction), the ROI would be far less, especially if holding for fewer years.
Of course many people that intend to save and invest said funds just spend them, while paying down a mortgage is a sure return.
