Are you ready to buy, but waiting for rates to come down? This is the position of many of today's buyers. Waiting. What if you found out that buying your next home now can be an excellent OPPORTUNITY? You can buy the home you love today and based on the loan program you utilize, at a discount!
Let's review where the real estate market has been, where it is headed, and compare details of a few loan options that could help you achieve your real estate and financial goals. One of the interesting loan programs buyers are utilizing in today's environment is the 2-1 Rate Buydown.
Yesterday's Market: Waiting and Watching
Over the past 12 months, the real estate market went from booming in 2021 to a near standstill by the beginning of fall. On certain days, interest rates reached higher than they had been in over 10 years. Buyers were disappointed when the purchase price they had previously qualified for was no longer option due to higher rates. Properties available for sale were minimal and not listed at very competitive prices.
Today's Market: A Purchase Opportunity
The tide is turning and we're here to share a good news story. For the past few weeks, interest rates are trending down, inventory is increasing, and the cyclical busy buying season is right around the corner. The housing market is beginning to heat back up. Today's environment is a unique and excellent opportunity to buy a home you love, on your own terms. Don't wait - this is a great time to take advantage of current home values, less competition, stronger negotiation, and a good probability of seller concessions.
The Perfect Home + The Perfect Loan
Buying a home you love at a discount sounds like a win on its own, but now let's talk financing. Each loan type comes with its own qualification requirements, costs, and benefits. These variables include a lower rate, lower down payment, lower credit score requirement, upfront fees, mortgage insurance, and more. An experienced buyer will take the time to analyze which loan program to use for their home purchase to take their rate of return to the next level.
Conventional, VA, FHA, and jumbo loans are familiar to most buyers, but there are options that can be incorporated into those loans which can be quite beneficial. One such program is the 2-1 Rate Buydown. This approach is becoming more popular among buyers and we are here to help breakdown why and how to use it to your advantage.
Seller Credit? Let's Compare your Financing Options
We'll use the example of a $500,000 home purchase, to compare the details of several different financing options. Last year, this home may have had multiple offers and sold quickly over list price. Today there are less buyers, resulting in sellers open to negotiating around 2% of the purchase price, or $10,000 for our example. Here are three ways to utilize this $10,000 seller contribution and the details of each.
Option 1: Reduced Purchase Price
The buyer and seller agree to reduce the purchase price by $10,000.
Purchase Price: $490,000
20% Down Payment: $98,000
Loan Amount: $392,000
Interest Rate: 5.888% (APR: 6.121%)
Monthly P&I Payment: $2,322.09
Option 2: Seller Concession as a Permanent Rate Buydown
The 2% seller concessions are used to buy the interest rate down for the life of the loan. In our example, $10,000 would equate to a 1% reduction in rate.
Purchase Price: $500,000
20% Down Payment: $100,000
Loan Amount: $400,000
Interest Rate: 5.125% (APR: 5.558%)
Monthly P&I payment: $2,177.95
This option of a permanent rate buydown also allows buyers to qualify for a higher loan amount. When interest rates increase, monthly payments increase, which can impact a buyer’s qualifying loan amount. A home you qualified for when rates were in the 5's may be out of reach when rates are in the 6's. To mitigate this challenge, the 2% seller concessions used to buy the rate down increases the maximum loan amount which makes the purchase possible.
Option 3: Seller Concession as a 2-1 Rate Buydown
A 2-1 Rate Buydown is similar to a permanent rate buydown or paying points for a rate. However, the "2-1" means the lower rate only pertains to the first two years of the loan. The interest rate for the first year is the lowest, 2% below the loan rate. In the second year it is 1% below the loan rate. The rate for the remaining 28 years (of a 30 year mortgage) is not reduced.
The 2-1 buydown has a unique feature if you refinance in the first 24 months. At the time of the refinance, you receive a credit for the unused portion of the buydown. This can be applied to your refinance and significantly reduce the cost.
How much does a 2-1 Rate Buydown cost?
The upfront cost of this buydown is equal to the sum of the difference between your monthly payment and the reduced monthly payment over those first 2 years. Let's see how a 2-1 Rate Buydown would work in our scenario:
The 2% seller concessions would be applied to the 2-1 buydown, which costs about $8,820. The remaining $1,180 of seller concessions can be applied to closing costs.
Purchase Price: $500,000
20% Down Payment: $100,000
Loan Amount: $400,000
Interest Rate: 3.888%* (APR: 5.915%)
Monthly P&I payment: $1,883.93*
*Rate/Payment/Savings shown is for year 1.
The 2-1 Buydown allows you to purchase, build equity in, and ENJOY the house you want now, at a discount, on your purchase terms, with the rate you want. In a year (or so), you may be able to refinance to a similar, or potentially better, fixed rate partially on the seller's dime. If interest rates drop next year, you could refinance to that lower rate and utilize the unused portion of the buydown credit (paid for by the seller) to offset the refinance costs.
How does this amp up the return on your home purchase? If home prices increase 4% over the next year, your $500,000 home is now worth $20,000 more. Add that $20,000 to the $10,000 you received from the seller in concessions and your $100,000 investment (down payment) has increased by over $30,000 in one year, a 30%+ rate of return in one year. That is something any buyer or homeowner can get excited about!
Ready to Take Action?
Now is the time. At Simplicity Mortgage, we are available to get you pre-approved and help you understand your loan options in preparation to finding the house you want to make an offer on. You'll soon be on your way to achieving your homeownership goals!
It is important to note that all figures used in this post are to only serve as an example. Assumptions were made based on the current economy and housing environment. Loan program qualification, interest rates, house prices, the economy, and seller concessions are all evolving variables and specific to the buyer, seller, and property.
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