How the 2/1 Buy Down Can Change Your Buying Power Today
One year ago today, interest rates were 3.75%. Over the last year they have ridden a roller coaster all the way up to hovering just under 7.00% today. Understandably, rising rates have sidelined many buyers. The general rule of thumb when it comes to buying power is that for every 0.5% increase in rates, purchasing power may be decreased 10%. A buyer looking to maintain a $5,500 monthly mortgage payment one year ago would’ve had purchasing power for a $1,500,000 home, and in today’s environment they have been reduced to homes in the $1,050,000 value range. Unfortunately, values have not decreased at the same cadence interest rates have risen.
Fortunately, there are a few products out there that lenders are putting to use for buyers, and today we are covering the concept of a 2/1 Buy Down.
A 2/1 Buy Down can be a total game changer for buyers in this current environment. In simple terms what it means is that for the first year of mortgage payments, they will be at a rate 2% lower than the quoted 30-year fixed rate. The second year, they will be 1% lower than the 30-year fixed. And the third year, they will revert to the originally quoted 30-year fixed rate. Within the first two years, the hope is that when rates experience a dip then buyers can take advantage of a refinance which will lock them into a more palatable 30-year fixed rate.
Example:
Purchase price: $1,500,000
Current Rates: 6.75%
Estimated Mortgage Payment (based on 20% down): $7,783.18
First Year at 4.75% Payment: $6,259.77 (saving $18,280.92 annually)
Second Year at 5.75% Payment: $7,002.87 (saving $9,363.72 annually)
Total Savings over two-year period: $27,644.64
Now, a rate down does have a cost associated with it — the good things in life are never free. BUT, the good news is that the seller can pay for it for you in the form of a credit through escrow. There are strategies to build it into the offer that are favorable for both sides and prevent you from coming up with the extra cash at closing to buy this amazing product.
Curious about how this could work for you and help you achieve you real estate goals without waiting for the market to change? Contact us today for a free consultation!
Bree Hughes, 949.556.2094