Now that Sellers are more likely willing to pay for Buyers’ Closing costs in today’s market, the BEST thing for Buyers to do is request “front-loaded” buy-downs. There are 3 options: the 3/2/1 buy-down, the 2/1 buy-down, and the 1/0 buy-down. For example, let’s say that today’s rate for a 30-year fixed Conventional loan is 5.50%. With the 3/2/1 buy-down, the Buyer’s rate the first year is 2.50% (i.e., 3% less). The Buyer’s rate the second year is 3.50% (i.e., 2% less). The Buyer’s rate the third year is 4.50% (i.e., 1% less). Then, the rate in years 4-30 is 5.50%. (On a 2/1 buy-down, the first-year rate is 2% less; then, the rate the second year is 1% less. And, on a 1/0 buy-down, the first-year rate is 1% less.)
There is a cost to do these buy-downs. It’s simply equal to the total monthly mortgage payment savings during the buy-down period. This is easy to calculate! The 3/2/1 buy-down will save the Buyer the most money the first three years … but this will also cost the Seller the most money … so, you may not be able to get the Seller to pay for all of it. Conversely, the 1/0 buy-down doesn’t save the Buyer that much the first year. Thus, the 2/1 buy-down will be the most common way to structure these – saves the Buyer meaningful money … and, at the same time, doesn’t require the Seller to pay an unreasonable amount.
These buy-down options can be used on Conventional, FHA, VA and USDA loans.
We anticipate that mortgage interest rates will drop in the next 12-24 months … so, there should be an opportunity to refinance in the near future. Using the 2/1 buy-down example above, if rates drop 24 months from now, the Buyer’s monthly mortgage payment will have been based on rates of 3.50% and 4.50% the first two years (or, and average of 4.00%) … which is well below market! And, if the Buyer refinances by the end of the first two years, they will never have paid a monthly mortgage payment based on today’s rate of 5.50%.
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