Mortgage Hacks Pt1 Buydowns
"Should I wait to buy a home till the interest rates come down?"
With the interest rates being the highest they've been since '07, this is a perfectly reasonable question to ask. My answer? It really depends on your specific situation. Yes, interest rates are higher than they've been in a while, and it feels especially high after the last few years of 2-3% rates. An important thing to keep in mind is that those rates are most likely not coming back in our lifetime. In fact, sitting where we are now, we are right around the 30-year average for interest rates.
So, what to do?
If you feel like you are mentally, emotionally, and financially ready to buy a home and the current interest rates are the only thing holding you back...I've got some hacks for you! Over the next month I am going to be sharing some mortgage hacks every week to help you bring down your rate, pay your mortgage off faster, and feel more comfortable beginning your home buying journey!
First up is the almighty Buydown. In the current normalizing market, many sellers are offering to buy down the interest rate for their buyers. Essentially what is happening is that the sellers are making a "concession" where buyers can choose to get a lower interest rate by purchasing discount or mortgage points. There are a few ways to go about doing this. There's the Interest Rate buydown, 3-2-1 Buydown, and a 2-1 Buydown. Check out how the math all works out in the graph below:
Crazy how much .25% can save you in interest and your monthly payment!
Something that is happening fairly regularly right now is the 2-1 Buydown. This is a concession to the buyer that reduces the buyer's interest rate (and monthly payment) during the first two years of homeownership. The goal here is to buy down your rate and have a more reasonable payment for the first two years, and then (fingers crossed) when interest rates stabilize and come down a bit you refinance and get your payment even lower!
"But wouldn't it be better to just low ball them on the offer? The market is crashing after all."
First off, no it is not crashing but that is a discussion for another day (honestly probably tomorrow...keep an eye out). Secondly, offering to buy the home at list price with a seller concession actually saves you wayyyyy more money.
For example, let's go back to that $500,000 home you've had your eye on. Buying the home with 5% down at a 7% interest rate would leave your monthly payment at $3,160.
Now, obviously times have a changed in the real estate market and there's no way you're going to pay full price (most homes in CO are still selling at 100% of the asking price, but this can change market to market. Chat with your local agent to find out what the average closed to list price percentage is!) Let's say you offer the sellers $475,000. That's a 5% decrease in price. Surely your payment will be way less! That's $25,000 you're saving after all! Let's do the math: $475,000 purchase price with 5% down and a 7% interest rate puts you at $3,002 a month. HECK YES! That's almost $2,000 dollars a year you're saving! That's awesome!
But you'd love to get your payment into the $2,000 range...should you offer lower? I wouldn't suggest it.... completely low-balling sellers runs the risk of alienating them right now and won't save you the amount of money you think it would. We are still in a seller's market and if you offend the seller...you might as well say adios to that house. Instead of taking another $25k off the offer price, consider a full priced offer and asking for a concession for a 2-1 buy down. Take a look at this math...
Purchase Price: $500,000
Down Payment: 5%
Concession amount: $11,072
Interest Rate year 1: 5%
Monthly Payment: $2,550
YOOOOOOOO. That is an incredible monthly payment. That saves you $610 a month (Not to mention $7,320 a YEAR) and look at the concession amount...$11,072. Even the sellers win in this situation!
Now that monthly payment is for the first year of the loan. In the second year your interest rate will bump to 6% and your new monthly payment will be $2,848. That is still saving you $312 per month. Utilizing this strategy, you would have saved $11,064 over those 2 years. Remember that your offer of $475,000 would only have saved you $158 dollars a month...You'd have to have owned the property for almost 6 years to see that kind of savings.
Because this is a 2-1 buydown, after the second year your interest rate will return to that original 7%. However, the hope is that after those two years (or sooner) the interest rates will have stabilized and be below that 7% mark. At which point you will refinance and lock in a lower rate for the remainder of the loan!
Knowing what you know now about this buydown program, are you thinking you should still wait to buy or are you feeling a little bit better about the real estate market right now? Feel free to text or email me if you have any questions about how to make this work for your situation or if you want to talk through what is actually going on in the market!