Mortgage rates have significantly increased in the last couple of months, so you’re questioning your plans to purchase a home. You’re wondering if you should wait for rates to drop. Let’s keep it real. Due to inflation, among other factors, rates are only expected to increase in 2023. The Federal Reserve needs time to get inflation under control, so if you’re waiting for mortgage rates to decrease, you may be waiting for a while.
Yes, higher mortgage rates affect housing affordability. Not only do they affect purchasing affordability, but they affect renting affordability too. Today, whether or not you choose to rent or buy, you’re going to end up paying more than in recent years. Let’s talk about the pros of purchasing rather than renting in today’s market.
Homeownership creates equity. Equity is what grows your net worth. Not only that, you should think about appreciation. When you rent, you don’t get the advantage of your home value increasing. Appreciation is a huge factor you should consider when purchasing a home. In a place like Los Angeles, buying a home is a massive long-term investment opportunity.
You’re thinking, “that sounds great long-term, but I still can’t afford to buy in today’s market”.
Yes you can, and here’s how: New Temporary Buydown. With the New Temporary Buydown lending option, you can afford to purchase a home, even with today’s higher mortgage rates. You get access to lower mortgage payments in the first 1-2 years of your loan, saving you thousands of dollars. Let us explain to you how it works.
You get added flexibility in the first few years of homeownership. With the 2-1 temporary buydown, your rate is two points lower in the first year and one point lower in the second year. The mortgage rate today is about 7%; in the first year of homeownership your interest rate will be 5%, and in the second year, your interest rate will be 6%. Let me illustrate an example for you. You get a loan for $500,000: your interest rate is 7%, and your loan term is 30 years. In this example, we are going to exclude your monthly property tax and your HOI; we are only going to talk about your P&I payment (principle & interest rate). In the first year of your mortgage, your interest rate is 5%. In other words you’re saving $642.40 per month. In the second year of your mortgage, your interest rate is 6%, so you’re saving $328.76 per month. From years 3-30, your interest rate is 7%; 7% is the interest rate today. Over the first 2 years of your mortgage, you’re saving a total of $11,653.97. Awesome right?
“Who pays for the buydown fee?”
The seller. The seller puts your total savings, $11,653.97, into an escrow account within the mortgage. At the start of your loan, you can see your total savings on your loan statement. In the first 2 years of your loan, you will be credited your monthly savings. Every month the balance in the escrow account will decrease. You can see these numbers on your loan statement as a negative or a credit.
“How is this lending option attractive to sellers?”
In today’s market, houses stay on the market longer, and sellers aren’t getting as many offers as when COVID-19 first hit. We are seeing more sellers having to put a price reduction on their house. Price reductions can be anywhere from $20,000 – $70,000, more or less. The seller has a couple of options; wait out the market in hopes someone will buy their house at asking price and risk having to reduce the price of their house, or they can sell to a buyer using the Temporary Buydown lending option. The buydown fee can be anywhere from $9,000 – $19,000; that is significantly less than the price reductions we are seeing today. The temporary buydown lending option is a way for sellers to sell their houses faster, and so they don’t have to reduce the price of their house for a significant amount of money.
“What happens if interest rates go down and I decide to refinance? Will the accredited balance go back to the seller? “
No. If rates go back down and you decide to refinance, then the remaining escrow balance within your old mortgage will be put towards your new loan.
Our preferred lender, Option One Lending, has lending options like this one and more. Don’t wait for interest rates to go down because you will be waiting for a while. Explore lending options like this one, and purchase your dream home today.
