Lower Interest Rates & Payments in this Market?

This is something relevant to the market that could help buyers and sellers in this competitive real estate space…

Lower Rates and Payments in this Market?  How?

By Rob McCarthy – 101 Loan LLC dtd 10/26/2022

I recently wrote this article (https://101loan.com/blog/2-1-buy-down-to-lower-rate-and-payment/) on 2 to 1 buy downs (or 3 to 2 to 1 buy downs) where a buyer purchasing real estate could have the seller credit points to temporarily buy down the buyers rate as an example:

Starting Rate is 6.5% (current for a 30 year fixed) as an example.  With a 2 to 1 buy down, the starting rate would be 4.5% for year 1 and then the next year, 5.5% and then the 3rd year until the end of the loan, 6.5%.  This would allow the buyer to get into the property with much lower payments the first 2 years with the idea of refinancing in 2 to 3 years when interest rates come down as analysts predict.

Here’s the Challenge…

These buy downs are only available for conforming loan amounts of $970,800 and less.  What does one do if the buyer is obtaining a jumbo loan which is higher in loan amount?  Also…what if the buyer wants a hybrid such as 7 year or 10 year fixed which is lower than a 30 year fixed in rate?

We have a Solution…

On a jumbo loan, you can still buy the rate down but instead of it dropping 1% or more in rate, if you choose a 7 year fixed (amortized over 30 years), the rate is .75 lower than a 30 year jumbo fixed (currently at 6.375% at 0 points) and is fixed for the next 7 years.  This gives the buyer, plenty of time for interest rates to drop; meanwhile the buyer gets to pay the lower payment for the next 7 years compared with the 30 year fixed with a significantly higher payment and rate.  Note: Rates are subject to change without notice and are only provided here for educational purposes.

“Most important” the Buyer can have the Seller cover the points/buydown to sell the house.  This is something more sellers are willing to do, to unload their property in a timely manner!

See the Examples of Different Price Points and Loan Amounts below where the Rate is Being Bought Down…

  • 1 Million in Price with 20% down payment = $800,000 loan amount – 7 year arm – 5.625% @ 2.25 point cost ($18,000) = $4605 mo/payment.
  • 2 Million in Price with 20% down payment = $1,600,000 loan amount – 7 year arm – 5.625% @ 2.25 point cost ($36,000) = $9211 mo/payment
  • 3 Million in Price with 20% down payment = $2,400,000 loan amount – 7 year arm – 5.625% @ 2.25 point cost ($54,000) = $13,816 mo/payment

Important Notes:  As a buyer, you have the seller pay for the 2.25 points as a condition of accepting your offer.  Those points lower your rate, lower your payment and lower your interest cost over time and are tax deductible to the buyer based on their tax bracket.

Attention Buyers:  In today’s market, with increased inventory and homes sitting on the market longer, you not only have more control in what you pay, but what the seller provides you credit wise so the payments are lower and more affordable.  Be sure to take advantage of the above.

Attention Sellers:  Now you have a tool you can provide potential buyers, something other sellers are not using.  Be sure to use the above so your listing is more competitive and sells quicker.

If you would like this priced out and would like to get preapproved, please let me know.  Thanks.

BTW…See our real estate and market report for what’s happening in the interest rate world right now.

Best Regards,

Rob McCarthy

Senior Mortgage Advisor

www.101Loan.com

408-377-4123 o  650-465-8957 c   408-608-1921 f

101 Loan – 6090 Hellyer Avenue #100, San Jose, CA 95138

CA DRE #01165697  NMLS #121019

Products/Services/Accolades:

  1. Residential Financing for Purchases and Refinances on 1 to 4 unit properties.
  2. Reverse Mortgage Financing to include Conforming, Jumbo, HELOC Jumbo’s.
  3. Commercial & SBA Financing to include Multifamily, Office, Retail and Light Industrial.
  4. Access to over 50 banks with over 200 “Five Star” Reviews on Yelp, Google, Facebook and Linkedin.

 

 

Want a Lower Payment and a Lower Rate Below Market…A 2-1 Buydown May be the Trick!

Want a Lower Payment and a Lower Rate Below Market…A 2-1 Buydown May be the Trick!…(Read Below for More Info)

 

What is a 2-1 Buydown?

A Buydown temporarily reduces the mortgage payment for the borrower. This happens because the seller offers a credit that pays the difference between the full P&I payment and the reduced P&I payment. The seller only needs to provide the credit and the lender handles supplementing the payment. So, it’s a seller credit used in a different way!

Why would a seller want to give this credit to the buyer?

A Buydown is paid for by the seller instead of the traditional lowering of the sales price when a listing doesn’t sell.  This potentially attracts more buyers because they get a much lower rate and payment for the first 2 years.  It also provides a lower payment helps buyers ease into their new home given all the new expenses they may have.  It also allows them to refinance when rates drop.

This also allows the seller to maybe not have to lower the list price.  This keeps home values as high as possible!  Since this is also a cost to sell the property then the sellers potentially get a tax break by lowering any capital gains (of course sellers should always contact their tax advisor on this).

You can also have a situation where the list price is fine and the sellers don’t need to lower it or give a credit to the buyers.  So then the buyers can counter to increase the sales price to cover the buydown subsidy and then have the sellers give that buydown subsidy!  Sellers get the same net sales price and of course the buyers are getting a much lower payment on their first 2 years!  Of course to do this the property has to appraise for the higher purchase price.  The buyers have to have the extra couple thousand for the down payment because of the slightly higher purchase price in order for this scenario to work.

Basically this is the borrower “financing” their buydown with the higher purchase price in order to get the seller to give the credit to fund the buydown!

Here Is an Example for Educational Purposes Only:

Interest Rate is 6.50%       Loan Amount is $715,000

P&I at $715,000 with a rate of 6.50% is equal to $4519.29/month

If a Seller credits the buyer with a subsidy, this amount can be applied to the buydown and reduce the 1st, 2nd or 3rd year payment, depending on the subsidy amount.

Let’s say a seller agrees to supplement the payment difference for years one and two.

The first-year payment for the borrower would be a rate of 4.50%.  The second-year payment for the borrower would be a rate of 5.50%.  Years 3-30 would be the normal rate of 6.50%.

Year One@ 4.50% = $3622.80 – P&I/Month

Year Two@ 5.50% = $4059.69 – P&I/Month

  • Keep in mind that the borrower still has to qualify at the NOTE RATE and not the buydown rate so in this scenario the borrower qualifies at the note rate of 6.50%
  • In this scenario with the 1st year rate being 4.50% and the 2nd year rate at 5.50% then this means their average rate for the first 2 years is at 5.00% which is still 1.50% LOWER than the current market rate!!

Seller Subsidy:

The difference between the Normal Payment of $4519.29 and Yr. One of $3622.80 is $896.49/Month.

The difference between the Normal Payment of $4519.29 and Yr. Two of $4059.69 is $459.60/Month.

If the Seller offers a subsidy of $896.49 x 12 = $10,757.88 (for 1st year) plus $459.60 x 12 = $5515.20 (for 2nd year) they would offer the borrower a total subsidy of $16,273.08 which would pay for the payment difference the first two years.

This strategy helps a homebuyer ease into their house payment and frees up funds for other things that would have normally gone to a house payment. NOTE: Seller credit cannot exceed maximum seller contribution for program selected.

 

For More Info, please contact me.

Best Regards,

Rob McCarthy

Senior Mortgage Advisor

www.101Loan.com

408-377-4123 o  650-465-8957 c   408-608-1921 f

101 Loan – 6090 Hellyer Avenue #100, San Jose, CA 95138

CA DRE #01165697  NMLS #121019

Products/Services/Accolades:

  1. Residential Financing for Purchases and Refinances on 1 to 4 unit properties.
  2. Reverse Mortgage Financing to include Conforming, Jumbo, HELOC Jumbo’s.
  3. Commercial & SBA Financing to include Multifamily, Office, Retail and Light Industrial.
  4. Access to over 50 banks with over 200 “Five Star” Reviews on Yelp, Google, Facebook and Linkedin.

Note: Interest rates and loan programs quoted are subject to change without notice or until locked and approved by lender.