Would you buy down rates with builder incentives?

[ProudTox2014]

We are buying a new construtction homes. I'm trying to make the best choice for the family. I need outside opinion to make sure I'm thinking about this correctly.

Details	Option1	Option2
Loan Amount	358215	358215
Points	0	6.625
Cost of Points	0	23732
Rate	0.0716	0.055
Total Closing Cost	34463	53676
Cash to Close	115835	135049

The builder is offering 25K builder credit with etheir option. So After the incentives it is either $90836 cash to close with 7.16% or $110049 cash to close with 5.5%.

Does it make sense to buy the rate down to 5.5% with the builder incentives? I have the cash available and after payment will have a few months of emergency funds.

We re intending to stay in the house for 10 or more years unless a job is moving us away.

Thank you all for your opinions

[NoMoreE46]

What do the numbers (monthly payments paid) say for Option 1 vs Option 2 after the 10 years?

Points can be a tax advantage item  in year 1.

[Horseshoez]

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@ProudTox2014 wrote:

We are buying a new construtction homes. I'm trying to make the best choice for the family. I need outside opinion to make sure I'm thinking about this correctly.

Details	Option1	Option2
Loan Amount	358215	358215
Points	0	6.625
Cost of Points	0	23732
Rate	0.0716	0.055
Total Closing Cost	34463	53676
Cash to Close	115835	135049

The builder is offering 25K builder credit with etheir option. So After the incentives it is either $90836 cash to close with 7.16% or $110049 cash to close with 5.5%.

Does it make sense to buy the rate down to 5.5% with the builder incentives? I have the cash available and after payment will have a few months of emergency funds.

We re intending to stay in the house for 10 or more years unless a job is moving us away.

Thank you all for your opinions

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I'm in home buying mode right now and am working with an experienced MLO, he said, "Under no circumstances should you pay points right now."  Why?  Because with rates as high as they are today it is HIGHLY unlikely you'll be net-positive before you refinance due to lower rates.

[ShanetheMortgageMan]

What state are you buying in?  $34k of closing costs (before points) on a $358k loan amount is insanely high.  

If the amount of points being charged is $23,732 then why does your funds to close only increase by $19,214 with that option?

Assuming these rates are for a 30-year term then the difference in monthly P&I payment is $2,421.83 vs. $2,045.16, or $386.67/mo.  You'd pay $19,214 more at closing to get that benefit, meaning after 50 payments you'd breakeven, not factoring in the cost of inflation.  To me that is a little longer than I'd like to break even, there is also a reasonable chance that rates will get down into the 5's within by end of 2025, although that chance isn't as great as was projected to be just a few months ago but still a good chance that in the next 1-2 years a 5.500% rate will cost a lot less than 6.625 points.  My gut says to take the higher rate and refinance when rates move lower.

[ProudTox2014]

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@NoMoreE46 wrote:

What do the numbers (monthly payments paid) say for Option 1 vs Option 2 after the 10 years?

Points can be a tax advantage item  in year 1.

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I did a quick calculation and the answer is in the table below

Rate	7.12%	5.50%
Principal Paid	79K	89K
Interest	267K	203K

So that is a saving of > 60K in interest over 10 years

[ProudTox2014]

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@ShanetheMortgageMan wrote:

What state are you buying in?  $34k of closing costs (before points) on a $358k loan amount is insanely high.  

If the amount of points being charged is $23,732 then why does your funds to close only increase by $19,214 with that option?

Assuming these rates are for a 30-year term then the difference in monthly P&I payment is $2,421.83 vs. $2,045.16, or $386.67/mo.  You'd pay $19,214 more at closing to get that benefit, meaning after 50 payments you'd breakeven, not factoring in the cost of inflation.  To me that is a little longer than I'd like to break even, there is also a reasonable chance that rates will get down into the 5's within by end of 2025, although that chance isn't as great as was projected to be just a few months ago but still a good chance that in the next 1-2 years a 5.500% rate will cost a lot less than 6.625 points.  My gut says to take the higher rate and refinance when rates move lower.

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Thank you for your suggestion

I'm in PA so the prepaids are insanely high.

Prepaids includes like 13 months of tax escrow ~ 11K

1 year of insurance escrow ~ 1K

and 21 days interests + 3months of insurance

Do they charge fees when you refinance? Do you pay point at refinance also? New to this. The points are pretty much covered by the builder incentives.

[ShanetheMortgageMan]

In PA that still seems very high, but since it's new construction usually the builder doesn't pay for any of the transfer taxes so the full 2% would be shifted over to your side of the settlement statement to pay for.  Regardless, you'd have to post an image of the 1st two pages of your Loan Estimate as images here (blacking out the personal information) to get a full analysis.

Yes, closing costs are charged on a refinance but there are no transfer taxes to pay.  You still would have underwriting/lender fees ($1k-$2k), credit report ($75-150), appraisal (around $600), title insurance & settlement/closing fee (will come out to around $2,500), and then recording charges (around $150).  You also set up a new escrow account (prepaids), but will get a refund from your current loan's escrow account that makes that part pretty close to a wash.

[ProudTox2014]

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@ShanetheMortgageMan wrote:

In PA that still seems very high, but since it's new construction usually the builder doesn't pay for any of the transfer taxes so the full 2% would be shifted over to your side of the settlement statement to pay for.  Regardless, you'd have to post an image of the 1st two pages of your Loan Estimate as images here (blacking out the personal information) to get a full analysis.

Yes, closing costs are charged on a refinance but there are no transfer taxes to pay.  You still would have underwriting/lender fees ($1k-$2k), credit report ($75-150), appraisal (around $600), title insurance & settlement/closing fee (will come out to around $2,500), and then recording charges (around $150).  You also set up a new escrow account (prepaids), but will get a refund from your current loan's escrow account that makes that part pretty close to a wash.

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Unfortunately the forum won't let me post pictures. Anybody knows of a way to do that?

[ShanetheMortgageMan]

You have to make sure "Rich Text" is selected, then you can upload them by clicking on the "photos" that I've circled in red below.

Alternatively you can upload them to a 3rd party website, such as imgur, then post the link to it here.

[ProudTox2014]

The rich text is not working for me.

Here is the link to the image: https://postimg.cc/kR93G3g7