Pay Less in Interest Rates With The Buying Down | Home Buying Tips
Interest rates have been fluctuating between 5.5% and 7% in the past few months, but did you know that there is a program where you can pay 1 to 2% less over the first two years? In this episode of Aloha O'ahu, I'm going to show you how buying down interest rates can be a win-win for both Buyers and Sellers. We'll find out his a buydown works so you can see if it's the right move for you.
How it Works
Even though the interest rates have been fluctuating around 6%, buyers have a path to negotiate their interest rate to a lower rate for the first two years. This gives buyers a much lower payment and helps sellers sell their property in a slightly slower market. Let's discuss how a rate buydown works.
It's just like it sounds: money is put aside to pay one and two interest percentage points over two years. The buyer asks the seller for credit that helps pay down their interest rate for the first two years, and we would write that up as part of your offer. The funds - which are held by escrow - are released so that the buyer saves 2% on their interest rate in the first year and 1% in their second year.
If you, the buyer, lock in your interest rate at 6%, you need to be able to qualify at that rate. But that first year, you will be paying 4%, because two percentage points were paid by the seller. This means you'll be paying a rate of 5% that second year via the funds that were set aside. You'll then be paying the full 6% by your third year.
Benefits for Buyers
The reason that a buydown is an attractive offer for buyers right now is that it provides a lower interest rate - and therefore a lower payment - for your first two years, In addition, the hope is that rates will go down over the next two years and you can refinance, if that's an option.
The most important thing is to discuss all of this with your lender. This is because they're the person that can help a buyer with what they qualify for and what their payments will look like over the next several years.
Benefits for Sellers
Now that we know about the buyer, how does this help the seller? As we discussed, a rate buydown happens when you, the seller, agree to pay points - or 1 to 2% of the loan amount - to buy down the buyer's interest rate. This makes your house much more affordable and therefore much more appealing to buyers.
In addition, when marketing your home, your property will stand out amongst the other homes listed for sale since you have a more creative and beneficial offering for those buyers. Additionally, as the seller, you are actually going to need more money by buying down a buyer's interest rate versus doing a price reduction. This makes it a win-win.
Understanding the Numbers
Let's give this some context using $1 million, just because it's an easy number. Of course, you can adjust based on your actual price point. Remember, according to our 2-1 buydown scenario, your interest rate was bought down by 2% the first year and 1% the second year.
If you are buying a million-dollar house at an interest rate of 6.5%, the principal plus the interest would cost you about $6,300 a month. If you were able to negotiate to buy down your rate by 2% that first year and you're borrowing $1 million, you're now essentially paying a 4.5% rate. This would take your monthly payment to approximately $5,000 during your first year.
During your second year, your interest rate is bought down by 1%. This means your monthly payment will be at 5.5%, making your new monthly payment approximately $5,700. The savings would be roughly $23,000 over those first two years. That's a very nice savings for a buyer! Additionally, this incentive to the buyer helps the seller sell his or her property.
Things to Remember
Please note that unless your loan is refinanced, the rate will return to the original interest rate you locked in at two years ago with your lender. As always, talk to your lender to determine what you qualify for a a buyer. Also, please remember to ask your lender what your payments are going to look like at the rate you locked in initially.
This will ensure you're comfortable once you're paying the original rate, in case you're not able to refinance. Of course, there is no guarantee that interest rates are going to go down over the next two years. However, there is a good chance that if rates continue to rise, you will still be in a good place by locking at the rate you have.
I'm Here to Help
If you have additional questions about rates and loans, contact your lender. If you don't have one, I have several I work with on a regular basis who I'm happy to recommend. If you would like any more information about buying or selling real estate on the island of O'ahu, please feel free to reach out.
Don't forget to like this video, hit the subscribe button, and find me on all the social media platforms @jillward808. Stay tuned to see what I feature on the next episode of Aloha O'ahu!