With home prices and mortgage rates at all-time highs, it’s time to be creative about financing options. Current standard mortgage rates are hovering at 7%, but lenders are offering products that bring monthly payments down to make homeownership affordable.
Last week we discussed mortgage points. This week’s topic is the 2-1 buydown loan program. This is a mortgage agreement that offers a low interest rate for the first year of the loan, a higher interest rate the second year, and then kicks into the full rate in year three and beyond. This type of loan works well for buyers who are confident that their incomes will increase. Speculators, who believe that interest rates will decline in the near future, may also be attracted to this loan, with the intention of refinancing. Finally, this is a lending option that may be appealing to those who are credit challenged with a high dept to income ratio.
The rate on a 2-1 buydown is two percentage points lower than the note rate in year one, and one percentage point over in year two. The borrower will have to qualify for the current market rate and receive seller credits to use this program. This cannot be funded by buyers. Essentially the difference between the monthly payment in years one and two, compared to years three through thirty is held in an escrow account by the lender.
Instead of negotiating on price, we encourage buyers who would benefit from this type of loan to ask for seller concessions. A lower interest rate will bring down monthly mortgage rates more than a lower sales price on a home. For example, the monthly principal and interest payment on a $625,000 purchase price with a $500,000 loan with today’s market rate of 7.25% is $3,411. With the 2-1 buydown your monthly payment will be $2,761 in year one, $3,079 in year two, and $3,411 in years three and beyond. If you were to just reduce price by $25,000 with no seller credits, a $480,000 loan at today’s market rate is $3,274.
Sellers who are trying to make their homes more attractive to buyers may consider offering to pay for these buydowns. In doing so their home may sell more quickly and at a higher price.
If you are buying or selling, contact us to learn more about how to navigate today’s market.