Are interest rates scaring you away from today’s real estate market? Thinking of buying or selling but you’re afraid the current interest rates will keep you from getting the deal you want?
Today we are going to talk about buydowns and how they can help you accomplish your real estate goals even in this shifting market, whether you are a buyer or a seller.
You may have recently heard about a buydown. First, I want to make sure it’s understood that I am not a lender. The Saltwater Shores Team specializes in real estate. However, a buydown is a tool that we’ve used many times to help clients sell and purchase homes.
So what exactly is a buydown? A buydown is a way for a borrower to obtain a lower interest rate by paying discount points at closing. Discount points, also referred to as mortgage points or prepaid interest points, are a one-time fee paid upfront.
I’d like to show you a sample of how a buydown can help the buyer have a more affordable monthly payment. And yes – this helps both the buyer and the seller. An interest rate buydown can make a house affordable for a buyer who thought they might have to wait a few years, hoping for interest rates to come down. And this can increase the pool of buyers for the seller. It’s a win-win.
Some of the types of buydowns include permanent buydowns, 2-1 buydowns and 3-2-1 buydowns. A 2-1 buydown, for example, is a specific type of mortgage buydown that allows homebuyers to save on their interest rate for the first two years of the loan. In a 3-2-1 buydown, the buyer pays lower payments on the loan for the first three years. For each of the first three years of the mortgage, the buyer’s interest rate would increase incrementally by 1% annually. The full interest rate would apply beginning with the fourth year of the mortgage loan.
In a permanent buydown, the interest rate reduction comes from purchasing discount points. This lasts the lifetime of the loan; however, the monthly difference to the house payment is much smaller. So how can a buydown be a negotiating tool? Well, if a buyer asks the seller to reduce the price by $10,000; the seller may want to instead offer to pay $10,000 toward buying down the buyer’s interest rate. For example, if the loan amount on a home was $500,000 with a 7% interest rate, the first years’ monthly payment could be $2684, year 2 could be $2997, years 3-30 would be $3326. And if re-financing is an option, year 3 or 4 might be the time to consider that, especially if rates have dropped. Since taxes and insurance are different in each location, I did not include those numbers in this calculator—this is just principal and interest. This example is just an illustration. Your lender can give you exact dollar amounts based on the amount you wish to borrow, your credit score and the current interest rate. Math may not be your thing – it really isn’t mine, but its pretty easy to see how this can save you money as a buyer, and can help you sell your house quicker, and save you money also, if you are the seller.
The Saltwater Shores Team works with many lenders who are great at helping our clients get financing approval and can help with interest rate buydowns.
If you are considering buying or selling and would like more information, please call or text me at 361.500.2187, send me a message or email.
