How do you combat rising Mortgage Interest Rates?
We dive into one method today with Interest Rate Buy Downs.
What is a “buy-down”? Well, it’s just that… the buyer spends more money to lower their interest rate. The pricing for such changes daily and is based on an individual’s loan product plus credit scenario so these are examples only for educational purposes. Your results could differ or they could match.
The reality is that many homebuyers today are also home sellers. People are selling their existing home and taking that equity to buy their next. With current market conditions often driving bidding wars for higher than expected sales prices, a seller (then buyer) could take some of those “extra” proceeds and buy down the interest rate, if desired.
Let’s set the stage for today’s (April 12th, 2022) Interest Rates… for a Conventional Loan with 20% down and $500,000 purchase price you’re looking at about 5.14% for a ‘normal’ interest rate. If that rate gives you pause and you were hoping to land closer to 4%, it’s possible, but comes with a cost.
Today it would cost $15,340 at closing to make lock in a 4% Interest Rate for 30-years. That may sound like a lot (and it is), but if you plan to be in the home a long time, it can prove worthwhile, especially if you are receiving $15,000+ more than you thought on the existing home. The monthly payment difference between these two rates is about $275 so while it would take 56-months (less than 5 years) to recover the cost, over the life of that 30-year loan, you would be saving $98,000+ in interest.
If we look at FHA/VA or government backed loans, the starting interest rate is lower… today about 4.3% and the cost to buy-down to 4% would be $4,500 or so.
If Interest Rates came back down in the future and you decided to refinance at that time, the buy-down now may or may not turn out to be the right call, but it’s always a gamble. Nobody knows exactly what is going to happen, nor when, when talking about the Real Estate / Lending Market.
**Always consult your financing professional to gain their expert opinion and make the decision that feels right to you, but this is one potential option to keep you moving where you want while securing a long-term rate that fits the budget.