With mortgage rates threatening to approach 5% every few weeks this summer, we’ve had more and more interest in ways to get mortgage rates fixed at below market mortgage rates. One of my favorite ways to lower someone’s interest rate is an option that we can use on ANY Government loan. The 2-1 Mortgage Buydown program allows us to Temporarily reduce your mortgage payments during the first few years of your mortgage.
How A 2-1 Mortgage Buydown Works
Let’s say you are applying for a mortgage and you want a lower payment than the one we are offering today. There are two good ways to do this – one is just more expensive than the other. We can get a PERMANENTLY much lower rate if you pay mortgage discount points. The Problem with this option – is that 1% of your mortgage loan amount equals one discount point, and to get even .50% interest rate lower than the current rate – is expensive.
Today (see the *** Disclaimer below), if you wanted a USDA Home Loan with credit scores above 680 the rate with no discount points and 1% origination fee would be 4.25%. If you wanted to get a 3.75% mortgage rate, it would cost you almost 3 Points, plus an origination fee. On a $200,000 mortgage loan, that’s a cost of $8000. That’s not going to cover all the closing cost – that’s just what it would cost to get a 3.75% USDA Home Loan mortgage at that rate. That’s a lot of money for First Time Home Buyers in NC.
So let’s look at how a 2-1 Mortgage Buydown works. With that same $200,000 USDA Home Loan, and today’s rates being around 4.25% – we could do the following, with NO origination fee:
- 2.5% Mortgage rate the first year
- 3.5% Mortgage rate the second year
- 4.5% Mortgage rate for the rest of the mortgage.
The cost to do this would be right at 2.625% or $5250 – which is, obviously MUCH lower than the $8000. Now, comparing apples to apples – of course, you have a mortgage rate of 3.75% on the one hand, and a mortgage rate of 4.5% on the other. So let’s look at just the Principal and Interest Payment of our $200,000 mortgage with all of this – meaning let’s look at our budget right now, and what the difference in the payment might make.
2.50% P&I Mortgage Payment: $790.24
3.50% P&I Mortgage Payment: $898.09
4.50% P&I Mortgage Payment: $1013.37
3.75% P&I Mortgage Payment: $926.23
So, with the 3.75% rate your payments are running $925 and some change. At 2.5% they are at $790. That $135 a month difference could mean weather someone qualifies to buy their dream home… or not.
Another way to look at it is this – why would ANYBODY want to pay $87 a month more for their house? That’s the difference between the 4.5% long term payment and the 3.75% bought down rate, and it’s true that over the years the 3.75% mortgage is cheaper by about $1050 a year .
Many people getting into their first home, believe that they will get a raise each year for the next few years. So if they can NOW afford a $790 payment – and the next year they feel they will have adjusted to owning a home, and can prepare for exactly what their payment will go to… it’s a good trade off.
If you make $45,000 a year, and you get a 5% raise, that’s over $180 a month raise… so it doesn’t take much to be able to AFFORD that little extra in the payment. Additionally – you qualify for about $30,000 larger home with the 2-1 buydown. A $170,000 house is probably not quite as nice as a $200,000.
Bottom line, a Temporary Buydown is most popular if a buyer has extra fund for closing costs. For instance, if the seller is willing to pay some of the costs, and your company is paying part of the cost for relocation – the additional funds could be applied to a temporary buydown. With this option, you make lower payments during the first years of the mortgage, without the uncertainty of an Adjustable Rate Mortgage (ARM).
Added Benefit?? While we are not Accountants (read: Check with your Tax Preparing Professional), we understand even though the Seller, or whoever, is paying this “buydown” on your behalf – you get to claim it on your taxes. It’s Pre-Paid Interest on a House… so an extra $4500 deduction, could be N-I-C-E!
If you have questions about how a Temporary Mortgage Interest Rate Buydown (or a permanent buydown) might help you buy a house in Raleigh – call Steve and Eleanor Thorne 919 649 5058 – we have the best rates, we love the 2-1 Mortgage Buydown Program, and we help people every day who want to buy a home! It only takes 15 or 20 minutes to get pre-qualified!
If today’s mortgage rates are at 5% (*** see Disclaimer below) then we might talk with you about a 2-1 Buydown. This is a temporary way to get your mortgage interest rate down.
*** DISCLAIMER*** Rates daily daily – sometimes MORE than daily. I am only quoting mortgage rates and discount points above so that I have numbers to actually show you HOW discount points and a 2-1 Buydown Work. This is NOT a quote for a mortgage rate. For an actual rate, and to see how the numbers would work out for your particular circumstance – please call us at 919 649 5058