The decision between having the seller help you buy down the interest rate using 2 points or lowering the purchase price by an equivalent amount depends on several factors. Here’s a breakdown of the considerations:

Buying Down the Rate with Points

Advantages:

  1. Lower Monthly Payments: Reducing the interest rate will lower your monthly mortgage payments, which can be beneficial for cash flow.
  2. Interest Savings: Over the life of the loan, a lower interest rate can save you a significant amount of money on interest.

Disadvantages:

  1. Upfront Cost: You need to pay for the points upfront, which increases your initial out-of-pocket expenses.
  2. Break-Even Point: It takes time to recoup the cost of the points through the savings on monthly payments. If you sell the house or refinance before reaching this break-even point, you might not realize the full benefits.

Lowering the Purchase Price

Advantages:

  1. Lower Loan Amount: Reducing the purchase price lowers the principal amount of your mortgage, which can lead to lower monthly payments and less interest paid over the life of the loan.
  2. Immediate Equity: A lower purchase price means you start with more equity in your home.
  3. No Upfront Cost: There’s no need to pay additional money upfront as you would when buying down the rate with points.

Disadvantages:

  1. Smaller Monthly Savings: The reduction in monthly payments might be less compared to the savings from a lower interest rate, especially in the long run.

Calculation and Analysis

To make an informed decision, you should compare the long-term financial impacts of both options. Here are the steps to do that:

  1. Calculate the Monthly Payment Savings from the Rate Buydown:
    • Determine the new interest rate after buying down with points.
    • Calculate the new monthly mortgage payment with the reduced rate.
    • Compare it to the original monthly payment without the rate buydown.
  2. Calculate the Total Interest Savings:
    • Determine the total interest paid over the life of the loan with and without the rate buydown.
    • Subtract the total interest with the reduced rate from the total interest without the rate buydown.
  3. Compare with Lower Purchase Price:
    • Calculate the monthly mortgage payment with the reduced purchase price.
    • Determine the total interest paid over the life of the loan with the reduced purchase price.
  4. Break-Even Analysis:
    • Determine how long it takes for the monthly savings from the rate buydown to offset the upfront cost of the points.

Example

Assume a $300,000 mortgage, 30-year term, original interest rate of 4%, and the cost to buy down the rate by 0.25% for each point (1% of the loan amount).

Rate Buydown:

  • Cost for 2 points: $6,000 (2% of $300,000).
  • New interest rate: 3.5% (if 2 points reduce the rate by 0.5%).
  • New monthly payment: Calculate the difference between the original and new monthly payments.

Lower Purchase Price:

  • Reduced purchase price by $6,000: $294,000.
  • Monthly payment based on $294,000 at 4% interest rate.
  • Compare total interest paid over the life of the loan.

By comparing these calculations, you can determine which option provides the most financial benefit in your specific situation.

If you have specific numbers for your situation, I can help run these calculations to provide a more precise recommendation.

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