How Does A 2-1 Interest Rate Buy-Down Really Work?

 

 

How does a 2/1 Interest Rate Buy-Down Really Work?

 

Transcript:

Hello Brenden Rendo from NextHome Neighborhood Realty I'm joined today by Joseph Dionne of Appli Home Loans and we're addressing today one of the biggest questions we're getting out there which is how does a 2-1 buy down actually works and is it beneficial for me as a buyer but not only that is it beneficial for the seller? So, Joe let's get into it. Absolutely, thanks so much for having me here really you know I'm talking on the lender side so I'm talking exclusively from the buyer right anything that's going to help the buyer is going to be good for the buyer in some context.  

What is a 2-1 buy down a lot of people have been saying. What is it how does it really work, is it really a lower interest rate, and basically what is it?  If you take the interest rate that you would that you're actually closing at for your first year 2-1 basically means for year one your interest rate is two percent lower than what it would be regularly. Then year two it's one percent lower than where it would be regularly and in year three it's right back to where it's supposed to be. So if your interest rates are 7.25-year one it would be 5.25 year two would be 6.25 and then in year three, it's back to 7.25.

Okay, now let's take a look and let's show the users some of the savings that they can see if they look if they choose to go with such a program absolutely so I do want to double check here we got a loan amount of 450 000 but purchase price of 400 000. actually, let me fix that we're going to do 380. Okay, so we're going to do five times so this is the cool part right like because people go how much does my interest rate really impact my payment and this is something a lot of people that are in the housing market have been wondering about and you can see here that immediately at that 7.25 that monthly payment that 25.92 that's principal and interest payment like that's not any I have anything out that's principal and interest payment and if you go down just below on that 2-1 buy down that 5.25 is a 493 dollar savings a month like that's that's that's huge so in that first year that saving is is almost six thousand dollars fifty nine hundred and twenty six dollars okay and then year two the rate goes to 6.25 but you're still saving 252 dollars and fifty four cents now some people have asked well wait wait a minute like why isn't it just half of 493 like why isn't year one savings 500 plus dollars we got to remember is you're paying down some of that principle too over there in that first year so there's a little bit of a calculation there but that second year you save three thousand dollars so over the two year period you're saving Eight Thousand Nine Hundred and Fifty Seven Dollars in interest payments and and that's huge.  Now I've talked to buyers and they go well I want that and they're like well can I contribute to that?  What can we do?  It has to be a seller contribution!  It cannot be, first off I don't know if I would advise someone to be like hey spend nine grand of your own money, like I would say just keep it in the bank and if you want to make that extra payment you can.  Okay, but the reality is it's a dollar-for-dollar cost that the seller is making so if that savings that two-year savings for that 2-1 buy-down is $8,957.   The seller would be giving you a credit as the buyer and it would be going into an interesting an escrow account and every month the mortgage servicer would be paying from that escrow account collecting that little bit of money for that saving so that you're not responsible for it. Okay, Okay, so it's actually a separate account. That yeah, it's kind of like the seller's giving you money to prepay your interest in a way.  Bingo, that's exactly what it is the seller's just giving you money to prepay part of your interest which is keeping your monthly payment down.

Now the big thing that we hear is people go awesome, so I qualify for more home because I'm doing a 5.25 now?  Yep, no that's not the case you qualify based off the actual rate that you close at which is 7.25,  in this example.  So that's a big question, because you see a lot of news out there that, oh people are starting to get into risky mortgages again.  Yeah so you're really not getting into a risky mortgage job because you're actually qualifying for what you truly can buy to begin with exactly and then I guess the benefit to this is everyone's kind of got their crystal balls out and are predicting well defense is going to have to pivot and rates are going to come down in the next year or so you hit it on the dot right there right is a lot of people are thinking rates are going to go down right and that's the hard part is well do I wait for rates to go down and the challenges and all of this is you know a lot of people like we kind of go into the the thought process before of well the you know well at some point the housing Market's gonna gonna gonna slow down and prices aren't going to go up hasn't I mean now they're not growing to where they were but we're not seeing that crazy rebound that everybody was thinking was going to happen right conversely you know rates will go down but do you want to continue to wait like you can get into this product and their most like most industry forecasters like not myself I'm not saying I am but I I tend to say like I'm Gonna Leave the experts that that's what they do all day and that's what they're paying big big bucks to do I'm gonna follow their Direction they're are all thinking sometime in the next I'm seeing as early as six months from now and I'm seeing as late as like 18 months they think rates are going to go down okay well in that situation A 2-1 buy down is perfect and here's the cool part let's say you refinancing a year and you still have six thousand or three thousand dollars in that escrow account it just goes to a principal reduction to your new book so you don't lose that money that's nice now what type of loans can we use this product on is there limitations there are some limitations you cannot use this on investment products but I'm conventional I can do it for primary and second day for FHA I can do it and I can do it on VA so those are kind of the products right now Primary Home FHA VA conventional or secondary home unconventional so that basically that's going to cover 95 of the people out there 95 of the people absolutely fantastic so really as a buyer I these days I kind of want to look at this product it's a really cool and the cool part is it it doesn't add any underwriting time it's no special scenario you fill out an addendum you get the credit from the seller and that's pretty much it we handle the rest excellent I mean that's a lot that's a lot of savings and we know from from doing our numbers on a weekly basis that there's room in there these days to go back and ask ask a seller for this absolutely so I'm curious though like I'm looking at it purely from a buyer perspective what's that seller perspective look like is it really beneficial for a seller well that's that's a great question and with the market the way it is today it can be a very big benefit for them instead of looking at a price reduction looking at giving the concession what I did is I worked up our numbers you know based on the exact same you know loan scenario that we had looked at where we were doing a purchase of four hundred thousand dollars okay and going through the net this is where we still sold it at the higher price of the four hundred thousand dollars but we do our buyer the concession worked with you said okay this is how much he needs you know to do the 2-1 buy down so we kept it at the same at the same scenario and as a seller I would net 257 thousand dollars now say I had I had to come back and we're sitting there we're looking at things we're not getting a lot of showings and an agent is saying well we're gonna need to cut the price and most of those price Cuts these days are roughly running you know four to five percent when they do a price cut so you look at that at a five percent price cut dropping our price to 380 000 not giving any concessions my estimated Knack drops to 248 000. I lost roughly nine thousand dollars yeah yeah because you're essentially they're paying twenty thousand dollars less they're getting twenty thousand less versus on the two one buy down they're only having to give nine grand in concessions yep and you look at that from a seller's perspective it's a great way to keep up my net up but also we're using the equity that's been built from The increased prices the houses are still going to appraise yeah the houses are still going to appraise so it's going to help keep sales prices up where they currently are, yeah and it really turns out to be a win-win situation and that's what you're always looking for in a transaction make it a win for the seller make it a win for the buyer comes with many of the mines and boom you know let's get this transaction done and that's I mean like you said like you know a 20 grand price reduction for a buyer may only net I'm 60 to 70 dollars in monthly savings

 

in monthly savings for the first year 250 for a year two like that's a big saving it's going to take a while to see that that break even point of that price reduction it may be you know you're talking eight nine years before there's that break even which how the average consumer is only in their mortgage for seven years yep like I I think right now like this 2-1 buy down and the big like the big you know macro type scenario is it helps keep prices where they are because now we're not seeing a race to drop prices which exactly what we want to see that housing market stay stable because everything else is tied to it you know the entire Economy churns based off of this housing market and so far here in Orlando we're holding steady so well thank you everyone for your time if you have any questions directly about the 2-1 or you want to run a scenario we'll actually put a link to the um spreadsheet down below or off or call Joe or call myself reach out we're here to help you and answer any questions you have have a great day thanks so much guys take care