It's no secret that mortgage rates are higher than they have been in many years. And while this is putting a damper on some homebuyer's plans, there are ways buyers can avoid paying the market rate if it's breaking the budget.
I talked to Mike Echery with Change Mortgage about what programs and options are out there for buyers now. Read on below for what he told me and if you have questions for Mike or want to reach him to discuss a mortgage, you can contact him via email at [email protected].
Mike let me know that one of the most favorable options that is out there for buyers now is something called a "2-1 Buydown." This is a credit paid at closing that buys the interest rate down for 2 years. This has to be paid for by the seller. This credit is put into an escrow account by the bank and is used to lower the homeowner's monthly payment for 2 years.
This program is called a 2-1 Buydown because for the first year of the mortgage, the interest rate is brought down 2 percentage points from the market rate. So as interest rates are about 7.5% today, the first year's mortgage interest rate would be 5.5%. The second year's interest rate is bought down 1 percent so it would be at 6.5%, and then for the third year and on, the rate would be the current market rate of 7.5%. From what we have seen, these programs cost about 2% of the purchase price of the home.
If sellers are unwilling to pay the higher credit amount for a 2-1 Buydown, there is also the option of a "1-0 Buydown." In this instance, the mortgage interest rate is bought down 1% from our current market rate the first year and then goes back to the market rate for the second year and on.
It's worth noting, these are not adjustable rate mortgages as they are based on today's rate and will not fluctuate if interest rates continue to rise.
Of course, many buyers and lenders are hoping that if buyers can get a buy down rate for a year or two, then these homeowners could re-finance into a more favorable interest rate down the road. We hope so, too! But it is worth noting that of course we don't know what interest rates will do and re-financing is not a certainty. Buyers should make sure they can afford the market rate for the long term and not bank on a favorable re-finance in the future.
The neat part about these programs is if rates do fall and homeowners can re-finance, the credit is not lost. Any remaining credit that is in the escrow account can be refunded to the homeowner or used to pay down the principal if the loan is re-financed.
The programs mentioned above need to be paid for by the seller but if a seller won't budge and a buyer is really concerned about the interest rate and their monthly payment, borrowers can also pay points on their loan to buy the interest rate down permanently. Mike said it's worth considering and lenders can run an analysis for borrowers to see where the break-even point is and if it's worthwhile to make this upfront investment for a lower monthly payment.
Another option buyers have is looking at new build properties. While working with builders can come with its own set of irritations (see our last blog post- Re-Sale vs. New Build- What's the Difference), they do run very aggressive interest rate promotions sometimes and this can be quite compelling for buyers. We have had a couple buyers get really good deals on interest rates with builders this year as the builders have been willing to buy down the rate about 2 percentage points for the entirety of the loan.
One interesting thing about this year is while the interest rates are a turn-off to some, other buyers who have been hesitant to compete over the last several years due to the intense competition have been able to participate and find some good deals for themselves. Negotiating is back on the table and sellers are willing to give more than in years past to close with a serious and well-qualified buyer.
If you have questions about interest rates and programs for buyers, don't hesitate to reach out!