Should You Buy Down Points or Negotiate a Lower Asking Price?   A 3-Bed/2-Bath Home in Oahu in 2024

In Oahu’s competitive real estate market, buyers often weigh two strategies to improve affordability: using funds to buy down points (reduce the mortgage interest rate) or negotiating a lower asking price. This analysis explores these options for a 3-bedroom, 2-bathroom home priced at $1.1 million, with the current 30-year fixed mortgage rate at 6.93%

We’ll use two buy-down scenarios: reducing the interest rate by 0.25% and by 1%.

Scenario 1: Buying Down Points

When buying down points, one point costs 1% of the loan amount and typically reduces the mortgage rate by about 0.25%. If you buy down by 1% (4 points), the interest rate could decrease from 6.93% to 5.93%. For a loan amount of $880,000 (20% down on $1.1 million), we’ll compare both 0.25% and 1% reductions.

Pros:

1. Substantial Monthly Savings: Lower interest rates significantly reduce monthly payments. For example, reducing the rate by 1% (to 5.93%) saves about $550 monthly compared to a 6.93% rate.
2. Long-Term Savings: These monthly savings accumulate, yielding significant financial benefits over the life of the loan.
3. Best for Long-Term Ownership: If you plan to stay in the home for 5+ years, the cost of buying down points is offset by cumulative savings.

Cons:

1. High Upfront Cost: Each point costs 1% of the loan amount. A 1% reduction in the interest rate could require $35,200 (4 points), a large upfront expense.
2. Risk of Short-Term Ownership: If you sell or refinance before the breakeven point, the upfront costs may not pay off.
3. Cash Flow Considerations: Using cash for points limits funds available for emergencies or investments.

Scenario 2: Negotiating a Lower Asking Price

Reducing the home’s purchase price immediately lowers the loan amount and monthly payments without additional upfront costs.

Pros:

1. Immediate Impact: A $10,000 price reduction lowers the loan amount by $8,000, reducing monthly payments without added upfront costs.
2. Simplicity: No calculations or breakeven periods are required, as the benefit is immediate and straightforward.
3. Reduced Closing Costs: A smaller loan reduces costs like PMI or escrow funding.

Cons:

1. Limited Monthly Savings: The immediate reduction in payments is relatively small compared to buying down the interest rate.
2. Negotiation Challenges: Oahu’s tight housing market may make price reductions difficult to achieve.
3. Limited Long-Term Benefits: Over the life of the loan, savings from a price reduction are less impactful than significant interest rate reductions.

Side-by-Side Comparison

For a $1.1 million home in Oahu with a 20% down payment ($880,000 loan), here’s how the strategies compare:

Key Considerations for Oahu Buyers

1. Long-Term Goals: If you plan to stay in the home for a long time, buying down points—especially by 1%—offers significant financial advantages despite the higher upfront cost.
2. Short-Term Plans: For buyers unsure of their long-term plans, negotiating a lower price is safer, as it avoids the risk of not recouping buy-down costs.
3. Cash Flow Priorities: If your budget is tight, minimizing upfront expenses (e.g., through price reductions) is a practical approach.

Conclusion

Choosing between buying down points and negotiating a lower price hinges on your financial goals, timeline, and cash flow. While buying down the rate by 1% offers the most substantial long-term savings, it requires significant upfront investment. Negotiating a price reduction provides immediate relief without the need for large initial expenditures.

Working with a knowledgeable real estate agent who understands your long- and short-term goals, along with an experienced loan officer, ensures you make the right decision for your situation. We won’t leave you out there in the streets hunting alone!