Are you a buyer who wants to buy a house here in 2022, but you don't wanna pay these crazy high interest rates that you're seeing today in the sixes? What if I told you that there was a way to get an interest rate in the 4% range still in 2022? What if you're a seller? And you're thinking about putting your home on the market and you're worried about, "Well, is this market shifting and am I gonna be able to sell?" Or maybe your home is on the market and you're having a hard time selling it with these new higher interest rates. Hey, I'm Andy Mandel with the Mandel Team at RE/MAX. And today I want to talk to you about a loan product called a 2/1 buydown, what it means for buyers, what it means for sellers, how it differs from an adjustable rate mortgage and how it could help you as a buyer, save a ton of money on interest, how it could help you as a seller, potentially sell your home for a higher price and beat out, get a better prop, get a better price than your neighbor's home and help you sell faster. So first, let's talk about what a 2/1 buydown actually is. A 2/1 buydown means you are getting, in the first year that you have a mortgage, 2% less interest than the normal rate. So hypothetically, if today's interest rate is 6%, in year one when you're making your payment, it's based on a 4% rate. So two points less than today's interest rate. In year two, it goes up to 5% interest still 1% less than today's rate of hypothetically 6%. And in year three, it adjusts up to 6%, today's rate, whatever you're locking in at.

So first I wanna talk about how this is different than an adjustable rate mortgage. Adjustable rate mortgages have a bad rep, because prior to the last crash in 2006, 2007, people were getting these adjustable rate mortgages and that was part of what caused the housing market to crash. They were having really low payments when their rates jumped up to the normal rates, they couldn't afford it, and it helped make the foreclosure process and the problem that we were having worse. So an adjustable rate mortgage, you're typically locking in a lower rate for 5, 7, or 10 years. And then it jumps up to typically what is called prime plus some sort of additional premium. So it's going up to what really is an unknown rate at the time that you're getting it. It's based on whatever the market rates are at the time that it adjusts, whether it's 5, 7, 10 years, whatever you lock in. So we don't know what that rate is going to be.

Prior to the crash, people were getting these adjustable rate mortgages and they were getting qualified based on the teaser rates, the low, low rate, but not necessarily what it could be when it adjusts. Not only that there were a lot of no documentation and stated income loans, what a lot of people refer to as liar loans, where people were getting qualified at not only at these ridiculously lower teaser rates that they knew were gonna go up, but they weren't even really qualified for that, because they were just making up income and they didn't have to prove that they had the ability to repay this loan. So that's not what's going on right now. In this 2/1 buydown example, you have to be approved for this loan at today's rate. So in a worst case scenario, if today's rate is 6%, when this adjusts, if you do nothing with this loan you have been approved at this 6%. So it's not the same kind of loan product that got us in trouble the last time. In addition to that, today's spreads, not to get too nerdy on you, but if you were to get an adjustable rate mortgage now, if today's rate is 6%, you're locking in a slightly lower rate for 5, 7, or 10 years.

From my experience, what I'm seeing right now, you're typically only saving about half a point. You may be able to lock in a 5.5% interest rate, which is obviously a lot higher than locking in a 4% interest rate on year one, 5% on year two. So you're not really saving that much of interest and there's a lot more uncertainty at the end of the loan on where interest rates are going to be when it resets. So let's talk about what a 2/1 buydown is, and how it can save you money as a buyer. Let's look at this example, and again, forgive me, this is gonna get a little nerdy, but pay attention 'cause it could save you thousands of dollars. So in this hypothetical example we're talking about an interest rate of 6%, a purchase price of roughly $555,000 and a mortgage of $500,000. So $500,000 on a $555,000 purchase price, roughly 10% down.

Again, these are rough numbers. We were missing a little bit here, but for arguments sake, let's call it that's 10% down. So on a 6% interest on a $500,000 mortgage your payment would be 300, or sorry, $3,330 per month. That's principle and interest only that is not include taxes and insurance, but you can see a normal payment would be $3,330 per month. If you do this 2/1 buydown in year one, your interest rate is 2% less. So that means year one, your payment is $2,652, saving you $678 per month on your mortgage. Year two, the interest rate resets to 5%. So your payments go up to 2,982 per month which still saves you $348 per month. Year three, it goes up to that 6% rate, which again makes your payments $3,330. So you're saving a ton of money upfront in years one and two. The total that you're saving is $12,324 in interest in years one and two. Now this amount of money can be paid for by either the buyer, the seller, or both.

So if you are a seller, and you're thinking about selling your property, maybe you're having a hard time selling it. You're talking about a price reduction. Well, typically when people are doing price reductions, I know for me, for example, if a listing that we have isn't selling, typically in my experience, that means it's overpriced by about 3%. That's typically the amount of money, give or take, that we would shoot for for a price reduction to cause more interest in the property and try to get offers and cause it to sell. So if you were a seller, and you were giving a 3% price reduction that would be a total of $16,650 that you are reducing from the price. Instead, if you do this 2/1 buydown method, you are giving the buyer a credit only for the amount of prepaid interest, which is $12,324. So if you paid for the entire amount of this 2/1 buydown, you'd be saving about $4,000, instead of having this price reduction. The buyer gets the benefit of having the lower mortgage payment. So it's an incentive to them to buy your house versus the neighbors.

Now this can be paid completely by the seller. The seller can pay maybe half of it. It's all up to negotiations, but you can structure this where you are incentivizing the buyer to do this 2/1 buydown, they're saving in year one, $678 per month. That's a huge advantage to today's buyer. And it's gonna help you sell your property quicker and for less money ultimately than having a 3% price reduction. Now, if you're a buyer, let's talk about this. So we all know we hear it all over the news. We're heading for a recession. You see it everywhere. Typically in a recession, home prices remain flat or even increase. In five of the last seven recessions, home prices remain flat or went up. They only went down by a big amount in the recession from 2008, which was caused by the mortgage meltdown. So it was a housing-related recession. That's a whole another topic we're not gonna get into it.

In the other recession in the '90s, where home prices actually went down, they only went down by about 2%. So historically speaking, home prices don't fall just because we are in a recession. But interest rates typically do go down in a recession. That's because the Federal Reserve lowers interest rates they're doing the opposite in a recession of what they're doing now by raising interest rates. So they lower them to stimulate the economy. So hypothetically, if we were one year two years out from a recession and the federal reserve lowers the interest rate, you, as the buyer, could take advantage of this program, you lock in a much lower payment for year one. If in a year, interest rates go down to 4% you can just refinance and lock in a 30-year fixed mortgage at that new lower rate, whatever it is, maybe it's in the fours, whatever, it's gonna be less than 6% most likely. Now, if we're wrong and interest rates continue to rise and we don't go into a recession, and then you got the benefit of what will end up being a low rate, 6% you'll be happy you got, if interest rates are in the 8, 9, and 10% range in two, three years, and we don't go into a recession and that's just where they are. So it's kind of a win-win for buyers as long as you are qualified for the payment at that 6% rate and you are comfortable with that payment.

Obviously, we never want someone to be house poor, and I don't want you to bank on refinancing it because if you can't, for whatever reason, you have to be comfortable with this payment, but there's a very high likelihood that we will be going into a recession. You will be able to refinance, if you are still employed and all that kind of stuff, at a lower rate and permanently save the money. Now, the best part is all of this prepaid interest, this $12,324, if we go into a recession in year one and then you refinance, whatever's left in that prepaid interest gets refunded to you. So there's really not a lot of risk in doing this because you're getting all that money back if you do refinance. Again with the caveat being you have to be able to afford this payment.

So let's talk about who this program is for and who it's probably not for. So if you're putting down 10, 15, 20% a bigger down payment, you're probably gonna be okay to do this kind of product. And I'll tell you why. When you refinance, the bank is gonna do an appraisal on the property. Hypothetically, normally when they're doing appraisals for refinances they tend to be a little bit more conservative than what you could get if you were to sell it on the open market. So if the appraisal comes in 5% less than what you think the property is really worth, what it could sell for today, you're still okay. You'll be able to refinance, maybe not for just as much as you want, but you'll be able to refinance. If you're only doing a 3 or a 5% down payment, and that appraisal in a couple years comes in a little bit less than what you want, you're gonna have a harder time refinancing and you might not be able to do it, which again is why you need to be able to afford the payment at today's interest rate. So it's probably better for someone who's putting down a slightly higher down payment 10, 15, 20%, this is a better product for you than someone who is only putting down 3 or 5%. So if you're a buyer, just know the average interest rate on a mortgage between 1971 and today, on average, it's been 7.71.

So while these rates have really skyrocketed very quickly, and it's a lot of sticker shock, they are in fact historically still below average, but I get it. They're higher than what there were two, three months ago. And it's scary to think about how much more your payment is, but it doesn't have to be this 6% rate. You can have a lower rate. There are options for you. If you're a seller and you're struggling to sell your home, you don't wanna have a price reduction, consider this strategy instead of having a price reduction. It might make a big difference as far as how much you net on the sale of your house. If you have any questions about how this affects you or if we can help you with this product, point you in the right direction of a great loan officer, make sure you give us a call, shoot us a text, send us an email, slide into our DMS. We're here to help you. Thank you very much for tuning in.

Posted by Andy Mandel on
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