Are you looking to buy, but waiting & hoping rates to come? This is the position of many of today's buyers. Waiting for the best opportunity to move forward. What if you found out that buying your next home now could work in your favor? Put an offer in on a home you love today and utilize a rate buydown to reduce your monthly payment!
Let's review where the real estate market has been, where it is headed, and compare a few mortgage options that could help you achieve your real estate and financial goals. An interesting loan program for today's housing economy 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: Create a Purchase Opportunity
At the start of this year interest rates were trending down, inventory was increasing and buyers were optimistic things were headed towards a buyers market. Over the spring and into the summer months, the market started to heat up and cyclical busy buying season began. All the while, rates have remained somewhat stationary, leaving many buyers waiting and wondering. This could be an excellent opportunity to buy a home you love, on your own terms! Now might be a great time to take advantage of less competition and stronger negotiation with a good probability of seller concessions.
The Perfect Home + The Perfect Loan
Let's talk financing. Loans such as Conventional, VA, FHA, and jumbo, are familiar to most buyers and each comes with their own qualification requirements, fees and benefits. These variables include a rate, down payment, credit scores, upfront fees, mortgage insurance, and more. An experienced buyer will take the time to analyze which mortgage is best for their specific purchase.
There are also some lesser known options that can be combined into those loans which can be quite beneficial to your home purchase. 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 may be less competition, resulting in sellers open to negotiations. If the seller is willing to compromise 2% of the purchase price, or $10,000 for our example, let's explore three ways to utilize the contribution.
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
SAVINGS: $144.14/month
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*
SAVINGS: $438.16/month*
*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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