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Mortgage rates are up a lot this year, but you may be able to ‘buy the rate down’

Shopping for a home? This story is for you!

DALLAS — A seasoned real estate professional says this should be a strong consideration for home buyers AND home sellers.

Recently, we were talking with big-time real estate broker Anne Lakusta, with GO Management, Keller Williams. While we were talking via Zoom, Lakusta shared her screen and showed us an email from a mortgage banker that we had to share with you.  

It was about an unnamed seller offering an incentive to get their home sold (that’s happening a lot now that the housing market has slowed). In this case, Lakusta explained it was, “A seller who wants to offer $7,500 to a buyer."

Option 1  

Free money for a home buyer! If you are house shopping, your first impulse might be to choose what’s behind ‘Door #1.’ Lakusta says based on a price of $450,000 and a 30-year fixed mortgage of $295,000: “Option 1 would be to take $7,500 off the price, and therefore, off the loan amount, “That is a natural reaction…let me just pay less for the house. Well, that lowers your payment by $39 per month.” 

That might still be very helpful if you plan to stay in the home long-term, without refinancing soon. That’s because over the life of the loan, that $39 in mortgage payment savings each month would slowly save you $14,040.   

Option 2 

But what if you don’t plan to stay in the home for a really long time? Or what if you think you might refinance in the near future because rates are high now and you may get a lower one in a few years? How else might you spend that $7,500 the seller is offering?  

We asked Lakusta what’s behind ‘Door #2: “Option 2 would be a 2-1 buydown”. Now, before you slam that door shut because it has intimidating financing words, those numbers represent points that you ‘buy down’ a loan. That basically means you are paying the lender more money upfront, so you owe less as time goes on. You can find more information about points here

Each point you buy down the loan typically lowers your mortgage rate by a quarter percentage point. NerdWallet offers this point buying calculator to help homebuyers decide whether it might be advantageous to them.   

Going back to the example in Lakusta’s email, where the loan was for $295,000 at a 7.25% mortgage rate, Lakusta says if we used most of that $7,500 the seller is offering us ($6,912), it would be enough to pay for a 2-1 buydown. As the numbers suggest, that discount would be for two years and would drop the mortgage rate two points (likely a .5% mortgage rate deduction) in the first year and one point (likely a .25% mortgage rate reduction) in the second year. After that, the full mortgage rate would apply starting in the third year. Lakusta showed the numbers from the banker, “That saves you $381 a month that first year…and then the second year, it is $195 a month (in savings)."

The total savings of $6,912 is far less than the buyer would get than if they went with the first option of just applying the full $7,500 to the sales price (and thereby financing $7,500 less). 

But with the 2-1 buydown, they would save almost $7,000 in just the first two years of their mortgage loan. After that, they could refinance if rates are lower. 

And Lakusta says, “A lot of lenders right now are offering a free refinance package if you refinance in the first two or three years. And that is something buyers should be asking about, and they should be asking for those details in writing.”

You can find more information about temporarily buying down a mortgage here and here.

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