With interest rates on mortgages having shot up faster and to a much higher level than experts were initially forecasting for 2022, Buyers need to consider all options to get their monthly payments to a manageable level.
One such option is something called a “Buydown.”
Ever heard of it?
It’s something the SELLER actually pays for on behalf of the Buyer. Since the market has pivoted a bit, some Sellers are happy to do this, as long as the overall offer for their home is still relatively strong.
Here’s How It Works…
A Seller pays to “buy down” the interest rates for a Buyer, usually for two years (in a 2-1 Buydown), although you can get a Buydown for just one year as well. Let’s stick with the 2-1 Buydown example for illustrative purposes.
That means a Buyer would pay 2% LESS than the current mortgage rate for the first year…and 1% less than the current mortgage rate for the second year (thus, the 2-1 name). At the beginning of the third year, the rate goes up to today’s current rate that the Buyer locked in. So if the current interest rate is 7.0%, for example, the Buyer’s interest rate would be 5.0% the first year, 6.0% the second year, and 7.0% the third year. This amounts to thousands of dollars in savings in each of the first two years. (That’s essentially what the Seller pays for.) Take a look at this example….
And You Can Still Refinance…
AND…if rates go below 7.0% during the buydown period — to the point where it makes sense to re-finance — the Buyer can refinance and potentially have an “escrow balance” of the remainder of the Buydown in their account (which can then be used toward lowering principal balance).
This tool hadn’t been used until recently, but it’s becoming more common with rates that had briefly spiked above 7%. I had a Buyer client who just took advantage of this way to save. My favorite lender suggested it, and we negotiated with the Seller of the property she had her eye on. Ultimately, we structured the Buydown as part of her offer, and the Seller agreed to pay for the Buydown. It’s similar to when Sellers agree to cover other types of closing costs, which can be prohibitive to young buyers or first-time homebuyers.
Great News, Even in this Tough Climate for Home Buying
So it ended up making my client’s budget more compatible with our current climate of high rates. The rate she is paying this first year is more like the rate she would have gotten had she purchased the home back in the early spring.
If you’re interested in buying but are scared off by today’s high rates, PLEASE reach out to me so I can refer you to a great local lender to brainstorm ways like this to get your rate down. Don’t just assume you can’t afford a home right now! I’m here to help and would love to talk with you, especially since this time of low buyer activity can work to your advantage. With more buyers “waiting it out” on the sidelines, that means less competition for you when you do find your dream home!