Ready to Buy a Home? Discover the Easy Way to Get the Best Rate Possible
Ready to Buy a Home? Discover the Easy Way to Get the Best Rate Possible
With recent shifts in the real estate market, buyers are feeling increased pressure when finding their next home. National inventory remains low due to sellers holding onto low-interest rate mortgages, while buyers find themselves in the midst of an increasing interest-rate scenario. In this informative article, we'll delve into the impact of higher interest rates on your monthly mortgage. Plus, we'll reveal actionable tips on how to reduce the interest rate, and even have the seller pay for it.
Inventory Low Nationwide As Sellers Hold On to Low Interest Rate Mortgages
Our national market is at record lows in terms of available houses. One reason this is occurring is because sellers are deciding to wait before upsizing or downsizing. The majority of sellers hold a mortgage at 5% or less. As interest rates continue to rise, they are hesitant to trade in a sub-5% mortgage for a 6% or 7% mortgage. Causing many of them to hold off on any moves until mortgage rates come back down. The real question is, will they?
Housing Affordability and Interest Rates
There is an inverse relationship between interest rates and home prices. People don't buy houses based on price, people by houses based on their monthly payment. The higher the monthly payment, the less likely people are to purchase at that price. When interest rates increase, the amount of home an individual can afford decreases accordingly.
If a buyer wants to purchase a home for $350,000, the final payment depends on what the interest rate is. See the table below to compare monthly payments based on interest rate.
$350,000 Loan Amount
Interest Rate Monthly Payment (P&I)
3% $1,476
6% $2,098
8% $2,568
If you are looking for your mortgage payment to remain at $2,098, the purchase price of the home changes dramatically based on the interest rate.
$2,098 Mortgage Payment
3% $495,000
6% $350,000
8% $300,000
As you can see, when interest rates are higher, buyers need to purchase less expensive homes in order to get the same mortgage payment. A mortgage rate buydown may be the best tool buyers can use to help mitigate the upside exposure risk of current mortgage rates.
Mortgage Rate Buydowns
A mortgage rate buydown is a strategy used by buyers to lower their interest rate in a high-interest-rate market. Usually, the buyer agrees to pay all or part of the points upfront in exchange for a slightly reduced interest rate over the term of the loan.
The most common mortgage rate buydowns are 3/2/1 buydown and 2/1 buydown, where the buyer pays additional money at closing for points that will be credited against their interest payments in each year of the loan.
A 3/2/1 buydown is when the buyer pays an extra amount at closing (in addition to any other costs associated with obtaining the loan) that is equal to three points on the 30-year mortgage up front. This amount is then credited against the interest payments in each of the first three years, resulting in a lower interest rate.
The first year, the mortgage payment will reflect an interest rate 3% less than the full amount. The second year , the mortgage payment will reflect an interest rate 2% less than the full amount. The third year, the mortgage payment will reflect an interest rate 1% less than the full amount. After that, the normal loan terms apply.
Similarly, a 2/1 buydown is when the buyer pays an extra amount at closing (in addition to any other costs associated with obtaining the loan) that is equal to two points on the 30-year mortgage up front. This amount is then credited against the interest payments in each of the first two years, resulting in a lower interest rate.
Buydowns are beneficial for a person if they anticipate needing to move in three years or less, as it results in lower payments during those first three years. It is also beneficial for someone who expects their income to increase substantially during the first few years and has access to more money now that can be used toward closing costs. Buydowns are always based as a percentage of the total loan amount, so the cost will vary depending on the purchase price of the home and how much the buyer is putting in as a downpayment.
Buydowns can be paid by the buyer or through concessions from the seller. Seller concessions are given for many reasons, including to motivate buyers in a slow market or to sweeten the deal. Concessions can sometimes be given in lieu of repairs done on the property. In today's market, it is commonplace for concessions to be requested at the time of making an offer.
Is a Mortgage Buydown Right For You?
When you're considering a mortgage buydown, it's important to weigh the pros and cons. On one hand, you can get a lower interest rate that could potentially save you thousands of dollars over the life of the loan. On the other hand, you may have to pay upfront costs that are not recouped until much later down the road (or not at all).
If you plan on staying in your home for many years, then a mortgage buydown might be worth it as you'll benefit from the lower interest rate for most of that time. However, if your plans are more short-term (3-5 years), then a buydown might end up costing more than it saves.
