Now more than ever, lenders are dusting off tried and true products to ensure people aren’t priced out of the housing market before they even begin the search for their new home. Home buyers and sellers need to be a little more savvy with the options that exist to help keep mortgage payments under control.
One of these options is called the “2-1 Rate Buy Down,” which may seem a little complicated on its face, but it’s really not all that hard to understand, even for non-math majors like us. Using this product allows buyers to negotiate a credit paid for by the seller to lower the interest rate on their loan for the first two years.
That’s where the name “2-1 rate buy down” comes in. The buyer’s interest rate would go down 2% for the first year and 1% for the second. After that, the interest rate returns to the going rate at the time of purchase. For example, if your rate at time of purchase is 6.5%, the first year of your loan would be at 4.5% and the second would be at 5.5%. For the remainder of the loan, the interest rate goes back to the original 6.5%.
Interest rates have a much greater effect on your monthly payment than most of us think. Without going into the deep dive math on this, this could save you thousands of dollars over the 2-year term versus a few hundred dollars by lowering the asking price by the same amount as the cost of the rate buy down. At that point, you can either refinance if rates have gone down or remain at the original interest rate you were quoted.
This sounds great for BUYERS, but since this credit has to be paid for by the SELLER, how can it benefit them as well?
As the market continues to shift, time on the market is increasing. Sellers, you can offer a 2-1 rate buy down instead of just lowering your asking price to entice buyers to purchase your home, only to have people still wary because of rising interest rates. You could also build a credit into your initial asking price in order to make your home more appealing right off the bat.
Obviously, there are more details and strategies to using a 2-1 rate buy down to your advantage, but we wanted to make sure you know about this option. Check out the below video and we welcome you to contact us so we can discuss this further in length.
We strive to be the best Realtors throughout Lake County and McHenry County by adding value to our clients and their families, so we hope you found this information useful.
If you want the best possible experience with either selling your home or buying a home (or maybe both!), The Levicki Group is ready to help you plan your perfect time to EXIT. Contact us if we can assist with any of your home buying or home selling needs.