buying down interest rate

[teton]

I am getting 6% back at closing from my seller that I was going to use to buy down the interest rate to make my payment more affordable. I had in my head that a 6% buy down would lower my interest rate about a point and a half. My LO just told me I will get 3/4 of a point off with the buy down. Seems awfully low to me and won't lower my payment much! I believe the 3.5% minimum down payment has to be my money, but am I better off using the 6% I am getting back for closing costs and additional down payment instead of a buy down? What do our experts think? Sale price is $187k with FHA 30 years.

[BrianB_The_Loan_Professor]

Here is the BIGGEST problem with buying down an FHA rate

Most wont tell you this

Agents are ONLY allwed to make 1% up front. So if you are buying down the rate that is the MAX they can make `1%

On a larger loan that is fine on a smaller loan that isnt enough to cover the overhead

I would use the 6% to pay all costs usually 2-3%\Then pay the broker who will have to charge up front 1% since that is the only way they can make their fee and then take the rest and buy it down as much as you can

there is no way to buy down 1.5% and it make sense the banks wont allow it without charging you an arm and a leg

let me explain (you probably know most of this)

you have a par rate (think golf hopefully you know the game)

Par is where the rate pays nothing and costs nothing

To get this rate the broker must charge their fees up front. To get a no cost (no point loan)

they have to raise the rate and the bank pays them

The opposite happens when you buy down you have to pay the bank to get the rate lowered

Hoeever here is where most people get lost this is not a simple math thing as the banks will aggressively make the cost to buy down more the farther you get away from par

so if par is at 5.25% 5.125% may cost .125% 5% may cost .375% 4.875% may cost .75% and 4.75% may cost 1.125%

The farther away from par the more it cost up front

To get your rate down 1.5% is not even available on most rate sheets

here is an example of one just so you can see what I am saying (random bank)

Par is at just over 5.125% (today 5.125% is costing a little but 5.25% is paying so par is somewhere in between

This rate sheet goes down to 4.5% that is the lowest they will go

4.5% is at a cost (before broker adds their 1%) of 3.3%

so for $100k it would cost $3300 plus another $1000 for broker

all this to save $40 a month

over 30 years this will save you but it may take 7-8 years to recoup the cost

a lot can happen during that time

[teton]

I guess I made a mistake asking for the 6% back at closing. They had offered 3% back and $2500 towards appliances. That might've been a better offer since $2500 for appliances is like $2500 in my pocket since I have to buy them anyway. The extra 3% back ends up being kind of chump change when applied to a buy down or even extra down payment. Thanks for your input.