This trick could save you THOUSANDS on your mortgage
The US real estate market is stalling as rising mortgage rates deter potential buyers from moving.
The average 30-year deal climbed to a nearly two-month high of 6.43 percent this week, driving home loan applications down 10 percent.
But is it all doom and gloom? After two years of a sweltering seller’s market, experts say buyers now have more power when negotiating a deal.
This has led to an increase in buying off mortgage interest deductions – a financial technique that can save thousands of dollars on a buyer’s loan repayments.
Buydowns involve a seller agreeing to pay a lump sum that is then used to lower a buyer’s interest for a period of time.
And many are increasingly resorting to the tactic of allaying buyers’ concerns about the cost of their home and winning the sale.
More homebuyers are negotiating mortgage buyouts, experts say, to assuage concerns about rising interest rates. Image is a stock photo of a home and not a home sold through a buyout
Often these negotiations are abandoned when a property has been on the market for a long time and sellers are struggling to find a buyer.
It may be cheaper for them to agree to these types of deals rather than lowering the price of their property.
Mortgage broker Adam Smith, who runs the Colorado Real Estate Finance Group (CORE), said, “Buydowns haven’t really been a possibility in recent years because mortgage rates have been so low it hasn’t been a problem for buyers.”
“But now we see that more and more sellers are considering it, because many people are put off by rising mortgage rates.”
The cost of the surrender is covered by the seller’s profit on the sale of the home, and the deals are split into two types: permanent and temporary.
Temporary buy-downs — which are much more common — make sellers pay to lower mortgage rates in the first year or two after the sale.
After that, the homeowner is responsible for the full rate.
Colorado mortgage expert Adam Smith said he recently saw a buyer negotiate a surrender that saved them $12,000 in two years
However, a permanent surrender – which is much more lucrative for the buyer but more expensive for the seller – is when the rate is reduced for the entire mortgage.
Common ways to structure the deal are three-year, two-year, and one-year buydowns.
In the industry they are referred to as: 3-2-1, 2-1 and 1-0 deals.
In a 3-2-1, the rate is heavily reduced in the first year, partially reduced in the second and third years, and returned to the original rate in the fourth year.
For example, a buyer can take out a mortgage with a rate of 6 percent and a 3-2-1 lump sum payment.
In the first year, they are only allowed to pay 3 percent on their mortgage before increasing it to 4 percent in the second year and 5 percent in the third year.
In the fourth year, the mortgage then reverts to the original rate of six percent.
A 2-1 buydown is similar, but spread over only two years.
So a buyer with a six percent rate can pay 4 percent the first year and five percent the second year.
They then pay the full six percent again in the third year and until the end of their mortgage — unless they refinance.
Smith says he recently negotiated a 2-1 buydown with a client, saving the buyers $12,000 over two years.
The buyers had bought a $700,000 home and taken out a $550,000 mortgage with an interest rate of 5.875 percent.
Credit expert Andrew Boyd says buydowns are more likely if the home has been on the market for a long time
But the sellers agreed to pay $12,000 as part of a buyout agreement.
As a result, the buyers will pay a rate of 3.875 percent in the first year of their mortgage – which will be increased to 4.875 percent in the second year.
By year three, the pair will revert to the 5.875 percent deal — at which point they could decide to refinance if rates are lower.
Credit expert Andrew Boyd, who runs the comparison site Finty, said buyers can save $627 in their first month on a typical deal.
He gave the example of a 30-year mortgage for $500,000 at a rate of 6.5 percent.
With a commutation rate of 2.1, he says new homeowners can pay just 4.5 percent in the first year.
It would reduce their monthly payment in the first year from $3,160 to $2,533.
It adds up to $7,524 in just one year.
Mortgage rates rose at their fastest pace in nearly two months, according to the Mortgage Bankers Association (MBA).
By year two, interest could rise to 5.5 percent, after which monthly repayments would cost $2,839.
Still, the buyer saves $321 per month – or $3,852 per year.
But Boyd added that buydowns require a lot of successful negotiations.
“You’re much more likely to get a deal on a house that’s been on the market for a while or if the seller is under pressure to sell,” he said.