When I switched brokerages to Magnolia I was introduced to Trey Powers and we met up for coffee. I had a notebook in hand and took notes on points, rates, loans and the mortgage process. Trey was always ready to meet and educate me on anything I had questions on. Through the ups and downs of the market I have always relied on him as one of my sources for expert mortgage info!
Interest rates have doubled in the last year and with the mix of high lending standards, high homes prices and now high mortgage rates it has sidelined many people who could afford a home last year, but due to interest rates, it has lowered their home buying power by 30-40% and priced them out of the current market.
Did you know that each point that the interest rate goes up a buyer loses 12% of their buying power? So in the last year a buyer who could afford a $400,000 home at a 3.4% interest rate can now only be approved for a $270k home. You’ll be hard pressed to find a home priced in the upper $200ks in the Texas Hill Country! This is why we are seeing buyer demand wane with the interest rate hikes.
Lending standards haven’t loosened and so buyers need a solution to the high interest rates. Today the rate is averaged at 6.98% according to Mortgage News Daily.
So what is a creative solution?
New home builders are buying down the rate and offering 5.5% or even lower interest rates and their business is booming!
How can a resale home offer something similar?
It’s called a 2-1 buydown and I’ve asked mortgage expert, Trey Powers, to help explain it to us!
Take it away, Trey!
How much does inflated interest rates affect the ability to get approved for a mortgage?
Available interest rate can make a HUGE difference in a buyer’s ability to qualify for a mortgage and definitely impacts their buying “power”. Let’s use an example of a home with a purchase price of $750,000 with the buyer putting down 20%. The loan amount is $600,000. The principle/interest payment on that loan with a 3.0% interest rate is $2,530. If that interest rate is 7.0%, monthly principle/interest is $3,992. It’s a difference in monthly payment of $1,462!
In order to qualify with the scenario above, a buyer would need an annual salary around $100,000 if rate is 3%. However, if that interest rate is 7%, buyer would need about $135,000 annual salary. Note – the estimates above would be for a person with ZERO other debt.
What can a buyer do in this high rate environment instead of just waiting for them to drop next year?
That question assumes that interest rates will drop next year. While we anticipate (and pray) that happens, there are no guarantees. Right now in our market many homes that are for sale are sitting. While rates may stink right now, we still have to classify this as a buyers’ market. High rates are the very reason buyer demand does not match availability.
However when rates do ease, buyers will jump in putting us in a more balanced market. For a family currently renting or one needing to buy a home (job relocation?) waiting is probably not the answer. In today’s market, buyers have leverage.
That can be used to get a better price and/or incentives such as contributions towards closing costs or a rate buydown.
What is a rate buydown?
The most typical is what we call a 2-1 buydown.
In the first 12 months, the interest rate is reduced by 2%. In months 13-24 the rate is reduced by 1%. Suppose prevailing rate is 7.0%. The homeowner would make payments at 5% for year one and 6% for year two. At the end of two years, the rate would be back to 7%.
Who pays for this?
In most cases, the cost for a 2-1 buydown is paid by the seller.
Can the seller also pay for additional closing costs outside of the rate buydown? Can the seller give closing credits in lieu of inspection repairs if they pay for this buydown?
A buydown can be offered in addition to any concessions or contributions to buyer’s closing cost (which are limited to either 3% or 6% depending on the terms of the loan).
Are there parameters for a 2-1 buydown?
A buydown is typically available only for a conforming loan which is a loan under $725,200 (for year 2023). That is a seemingly arbitrary number set each year by the Federal Housing Finance Agency. Above that amount, the loan becomes a jumbo loan, which has very different qualification guidelines and terms. Buydowns are typically not offered by jumbo lenders.
How much money would a 2-1 buydown save them on a $750k home in this environment?
Continuing with the same $750,000 purchase scenario above, here is the difference in payment.
Year 1 monthly principle/interest payment = $3,221 (saves $771/month
the first year!)
Year 2 monthly principle/interest payment = $3,597 (saves $395/month
the second year)
Year 3 monthly principle/interest payment is back up to the baseline of
$3,992.
One may ask, “That looks great for a couple of years, but what about after that?” The answer is REFINANCE.
As soon as interest rates ease down one percent (give/take) along the way, that homeowner will refinance their mortgage entirely to take advantage of the lower rate.
What is refinancing? Why would someone do this?
Refinance is going through the loan process again just as you did when you bought the home. However, instead of the loan paying the seller when you bought it, the loan is paying off your current mortgage – one you may have had for a year or more. You basically start afresh with a new loan.
Why? You would refinance when interest rates have dropped enough to significantly lower your monthly payment. A one percent reduction usually justifies a refinance.
You said earlier that the seller must pay for a buydown. How would someone find out how much this costs and is it a flat fee or dependent on each applicant’s situation?
The cost of a buydown is based on loan amount and interest rate and will therefore be different for every scenario. The cost is basically whatever the lender is giving up in interest income for those two years. I am asked for and provide these cost all the time to real estate agents and home buyers. It is a somewhat complicated formula.
Always rely on your local, experienced mortgage lender to provide information like this.
Why would someone choose to add a 2-1 buydown on a resale home?
As mentioned previously, many houses are sitting on the market as buyers sit back and bide their time. There are multiple ways a seller might incentivize buyers to make an offer. It could be a reduction in price, contributions to closing costs (less cash out of pocket for the buyer) or a buydown (lowers monthly payment for the buyer).
Why is it important to work with a local lender in this market? Can’t an online, big box
lender offer rate buydowns as incentives to use them?
Large online lenders are well known and well advertised. They may offer all kinds of incentives and quote low rates. However, while the company may be known, you have no idea who the loan officer is. They may have received their mortgage license last week and you are their first loan. The individual loan officer is arguably more important than the broker/bank they work for.
You should expect experience, a proven record, great communication and extraordinary customer service. Work local, check references and utilize referrals from people you trust. And finally, if you don’t have your lender’s cell phone number for evening and weekend calls, you are not important to them.
Trey Powers is a mortgage consultant with City Bank Mortgage, Dripping Springs. Trey has been voted Best Lender in Dripping Springs six years in a row. He is very active in civic and charitable roles, serving on multiple boards of directors. He loves God, his family, his job and his customers. Give him a call at 512-203-5869 or email at trey@treypowers.com.
So if you are wanting to purchase a resale home and are want a break on the interest rate then give me and Trey a call to find the best strategies to navigate the market!
Speaking of a resale home… my beautiful listing in Dripping Springs at 920deercreek.com is offering a 2-1 buydown credit! Check it out!
Looking to move to the Dripping Springs area, Austin or the hill country? I am a local Dripping Springs Real Estate Agent and would love to help you buy or sell a home in this area! Contact me and we can get started! 512-569-8480 or laurenclark@magnoliarealty.com
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