Buy Down Mortgage?

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Buy Down Mortgage?

Postby rayout » Thu Dec 27, 2012 11:07 pm

I am in the process of refinancing my residence - a duplex where I reside in one side and rent the other. I would drop from a 4.375% rate down to 3.625%. However the appraisal came back 20% less than my original purchase price from a year and a half ago due to the difficulty in finding comps for the property. 4 of the 5 properties used for comps had 20% less living space than my property.

I have the liquid assets to buy down my mortgage to meet 80% LTV and proceed with the refinance without dipping into my emergency fund (the past year I've been saving for the purchase of another rental property). Doing the math this nets me a return of around 6% on this "investment" (due to the extra savings on the remaining balance of the mortgage at the new rate).

In my mind this is a no brainer - but I wanted to tap the collective mind on whether this would be the best use of my money. I am still looking to buy another rental property in the next year but I should be able to save enough to make a downpayment in the next 6 months or so.
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Re: Buy Down Mortgage?

Postby Majormajor78 » Fri Dec 28, 2012 10:41 am

I did a similar move a couple of years ago and it was probably the best financial decision I've made besides moving to index funds. So long as the move does not hurt your emrgency funds, retirement or other short-term plans then it looks like a no brainer to me as well.
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Re: Buy Down Mortgage?

Postby LadyGeek » Fri Dec 28, 2012 11:02 am

This thread is now in the Personal Finance (Not Investing) forum (real estate).
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Re: Buy Down Mortgage?

Postby Qtman » Sat Dec 29, 2012 4:45 am

Sounds good to me. I have several rentals but own most of mine for cash, so mortgages not an issue.
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Re: Buy Down Mortgage?

Postby grabiner » Sat Dec 29, 2012 3:18 pm

rayout wrote:I am in the process of refinancing my residence - a duplex where I reside in one side and rent the other. I would drop from a 4.375% rate down to 3.625%. However the appraisal came back 20% less than my original purchase price from a year and a half ago due to the difficulty in finding comps for the property. 4 of the 5 properties used for comps had 20% less living space than my property.


You might try another bank if the appraisal is unrealistic.

I have the liquid assets to buy down my mortgage to meet 80% LTV and proceed with the refinance without dipping into my emergency fund (the past year I've been saving for the purchase of another rental property). Doing the math this nets me a return of around 6% on this "investment" (due to the extra savings on the remaining balance of the mortgage at the new rate).


This may be a good idea even if you could refinance the whole thing. Paying down a mortgage that you already hold gives you a long-term return; you don't get any money back until the mortgage is gone and all payments are eliminated. Paying down the balance before taking the mortgage out gives you a combination of short-term and long-term returns, because you will reduce the payments every month over the life of the mortgage.

If you can get a better appraisal with another bank, another option would be to refinance to a shorter term at a lower interest rate; since you have spare liquid assets, you can afford the higher payments on a shorter-term loan.
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