As I write this blog on Thursday, October 20, 2022, the national interest rate for a Conventional, 30-Year Fixed mortgage is around 7%. This time last year in 2021, the national interest rate for a 30-Year Fixed mortgage was roughly at 3%. Historically, a 7% interest rate is not bad. However, when you compare it to just one year ago, a 4% swing is significant as far as buying power is concerned.
Are you on the fence about buying a home? Are you still interested in buying a home, even though you are discouraged by the rising interest rates? What if I told you about a mortgage product that will save you money during the first two years of your 30 year fixed mortgage?
Like to hear it, hear it go:
The product is called a 2-1 Rate Buy Down. The intention of this product is to ease you into your monthly mortgage payment by reducing your interest rate by 2% for the first year of your loan, 1% for the second year of your loan and then by the third year of the loan, the interest rate gets adjusted back to your fixed in rate. Essentially, it is used to subsidize your interest rate for two years. Here is an example using the 7% interest rate:
If you buy a home today and you lock in a fixed interest rate of 7%:
Year one of your loan (introductory rate): 5% interest rate
Year two of your loan (step up rate): 6% interest rate
Year three - Year 30 of your loan (fixed-in rate): 7% interest rate
Here is another example using actual numbers:
Let's say you buy a $400,000 home, you put down a down payment of 10% and you lock in a 30-Year mortgage at a 7% interest rate (taxes, homeowners insurance and PMI are all included in the examples below)
With the above example, your monthly mortgage payments will be:
Purchase Price | Down Payment | Interest Rate | Year of Loan | Monthly Payment |
$400,000 | 10% | 5% | 1 | $2,500 |
$400,000 | 10% | 6% | 2 | $2,700 |
$400,000 | 10% | 7% | 3 | $2,900 |
*numbers above are estimates and will be different for every real estate transaction*
This is a way for you, the buyer to ease into your monthly mortgage payment without feeling overwhelmed.
There are some things to note about the 2-1 Rate Buydown:
This is not a free product. The cost is upfront and is roughly 2.5% of your loan amount.
The seller pays for the product in the form of a seller credit.
Say the Federal Reserve lowers the interest rates to 5.5% and you are in year two of your 2-1 Rate Buydown, the great news about this product is that you can refinance your loan at any time.
If you do refinance your loan, you do not lose the credit. Whatever is leftover gets credited to the buyer in the form of principal paydown. For example, if you owe $262,000 when you refinance, the extra left over from the credit is going to come off of the $262,000.
If you are interested in buying a home and would like to learn more about the home buying process along with the 2-1 Rate Buydown, please call me at 215-360-3434.