Can the strategy of buying your interest rate down benefit you and your home buying journey? What is the difference between a temporary and a permanent buydown?
Dave Bryce of Priority home loans explains what it means, the difference between the 2 and why you might want to take advantage of it. If you are buying a home and would like to get a lower interest rate ask your Realtor or lender about buying their rate down using seller concessions.
BUYING DOWN YOUR INTEREST RATE
EXAMPLE OF BUYING DOWN YOUR INTEREST RATE
BUYING DOWN YOUR INTEREST RATE VIDEO TRANSCRIPT
I think some of you guys already know this but I wanted to show you just what closing costs look like without really even doing much. You know sometimes i’ll tell somebody we need $10K in closing costs and they’ll say why so much closing costs? I just wanted to show you how this works because it’s not very hard to hit ten thousand dollars in closing costs. um so just just the escrow account on this particular transaction so this one is the sales price is 5.85 okay and these people were putting five percent down okay the escrow account on this one was about forty three hundred dollars none of these fees right here under these uh says estimated prepaid items and reserves for escrow none of those are anything that we’re charging the client but they need to come up with 4 300 just for this account um so what you have is you have a year’s worth of homeowners insurance you have um 10 days of prepaid interest through the end of the month that they’re closing in so if they were closing on let’s say august 21st we would collect about 10 days of prepaid interest through the end of that month um we’re collecting five months of property taxes on this one and then there’s also a two-month homeowner’s insurance cushion so all of this is getting pre-loaded into the escrow account at closing so even if we had zero closing costs and the title company charged nothing and the appraiser charged nothing nobody had any cost for anything you still need forty three hundred dollars just to pay property taxes homeowners insurance and some interest over here on the left hand side are closing costs which closing costs are really made up mostly of third party fees so you have the loan discount fee on that on this one and that’s to buy the interest rate down um you don’t always have a loan discount fee but on this one looks like there was one point you can see and one point for anybody doesn’t know means one percent of the loan amount they’re paying to get this interest rate on this one at the time it was 5.125 they paid one point um and you can see the loan amounts 567 450 and so 56 74.50 is one percent of the loan amount um then you have a processing fee an underwriting fee these are our fees and this is what what we charge on every loan across the board and that’s you know to pay the processors underwriters you know that whole the whole processing team this is where that money goes goes towards um then we have an appraisal fee 950 that goes to the appraiser that’s not doesn’t go to us um then there’s a credit report fee 192 dollars on this one that goes to third party credit reporting company that we pull credit with then you have um a loan doc prep fee that’s what that’s a charge from escrow then you have the title escrow settlement closing fee on this particular transaction the escrow company was charging 14 56 and 18 cents and that has to do with uh that that fee will change depending on what the sales price is so if this was a million dollar price point this this might be twenty three hundred dollars or something um this actually um is a little bit high from what we’re used to seeing on this price point under six hundred thousand fourteen fifty six but anyways um this fee is a third party fee charged by the escrow company and then there’s a title insurance fee 927.81 this is the title company ensuring that the title of the property that there’s no liens or infringements on the home or on the title of the property and then we have a recording fee with the county that’s the county charging a fee to record this transaction and then this particular home there was a homeowners association and there was a fee to transfer from the previous homeowner to the new homeowner of 150 um and then uh we have a title owners owner’s title policy owner’s title policy this is also the title insurance company this 1715 if you scroll down you’ll see right above the yellow line there’s a seller title insurance credit of 1715. so the seller it’s it’s customary in washington state for the seller to pay the owner’s title policy it the reason it shows as a buyer’s closing cost is because it technically is a buyer’s closing cost but in washington state i’m going to say 99.9 of the time the seller pays this this owner’s title policy um sometimes you’ll see on new construction a builder will not pay for it that’s kind of the one exception where i’ll see where um the seller is not paying for the owner’s title policy but nine you know 99 plus times out of 100 the seller will pay the owner’s title policy so is that that’s not anything that um i mean could we put in there that we would pay it if it made it that much sweeter on the buyer’s side you could that would be something i mean i’d probably look for other things to not confuse it like i just you know offer them that much more money for the house or something you know sure yeah because it might get it might confuse them i would i would think um so anyways this particular transaction there’s only one point origination which that’s that’s honestly that’s how like when you see rates quoted uh like with banks like online or mortgage companies they’re usually at least quoting with one discount point which this one has one point and so just with one point you’re looking at thirteen thousand one twenty seven but you can really subtract this 1700 number so you’re talking about eleven thousand you know whatever that is uh eleven thousand four hundred dollars or something like that is what the actual closing costs are on this one but then you also have this escrow account that you have to add in and now so now you need at least fifteen thousand dollars on this one of seller credit to pay for this person’s closing costs and their escrow account now this is just like a regular permanent buy down and you could buy the rate down a lot more and you could really start spending a lot of money on this loan discount fee um but i just wanted to kind of go over with you guys what it looks like with like what your buyers see for closing cost and really most of these are either third party cost or they’re the buyer just setting aside money to pay their taxes and insurance and some interest the the fees that are that are our company’s fees on this particular transaction are the 5600 the 700 and 695 the rest of this is all third party or them setting money aside in their escrow account and then you know you can see on this particular one you have a sales price of 5.85 plus the closing cost plus the the prepaid escrow account means that they owe 602 425 to buy this house plus pay the closing costs in the escrow they’re borrowing 567 that goes towards that 602. they’ve deposited 10 000 earnest money and then there’s that seller title insurance credit of 1715 which means they have a balance left at closing of 23 260. and on the far right here is a breakdown of what their mortgage payment looked like but this is what they see so this is this is a pretty standard uh loan estimate or cost analysis worksheet this is a cost analysis worksheet is just a simpler uh breakdown of the numbers um of what you they would see on a loan estimate.
Buying down your interest rate.
I’m going to show you guys a buy down
this this might look familiar to somebody in here but i the the names and and you know all that have been redacted here but um on this particular one this is a um this is a buy down a temporary buy down sorry where we did a 2-1 buy down the note rate on this one was 4.375 percent okay um this is a 10 down payment um so they borrowed 499 500 okay um the temporary buy down fee to do this 2-1 buy down was 10 000 the 2-1 buy down again means i’m going to show you something uh the 2-1 buy down means in year one they’re paying two percent below the note rate and in year two they’re paying one percent below the note rate and then the years three through thirty they’re paying four point three seven five okay that’s number one what’s that that’s great yeah no it’s really cool because in year one they they saved 552 a month on their monthly payment if they would have taken and they paid 10 000 bucks to do this so if they if they paid 10 000 down on their mortgage that only drops the payment maybe 60 bucks a month if they put ten thousand dollars more down payment down if they took ten thousand dollars and they wanted to um buy down the interest rate permanently they might save themselves 150 bucks a month or something over the you know every month for the life of the loan but somebody that you have that you know you know they’re projected to make more money in the future or maybe they’re having payment shock and they’re feeling like geez this is just this this payment’s too much this is a nice way that someone can graduate into their payments um and it’s a very conservative loan it’s just a 30-year fixed mortgage so they’re not doing anything risky this isn’t an arm but it does allow them to slowly ease into their payments so in year one two point three seven five year two three point three seven five years three through thirty so this says payment numbers 25 through 360. they’re paying the 4.375 rate yeah so this isn’t like some weird arm where the the rate then balloons out of control um after that first and second year so that’s just the standard rate and did we have to buy did that rate get bought down a point or was that just like the standard rate at that time yeah so there was a loan discount fee of only 624 dollars so it looks like they paid an eighth of a point to get the 4.375 interest rate and then they paid 10 000 to buy to do the temporary buy down so it was almost it was almost zero points for them to get the 4.375 note rate which that’s the rate for 30 years and then they paid that 10 000 up front to do this thing here where you get the 2.375 then 3.375 um what was the so is this their payment um it says borrower’s portion of principal and interest okay and it adjusts to 2500 basically at the end of it well yeah so the the the payment is the payment but what happens is this 10 000 here that was paid up front gets used to subsidize these payments so in year one it’s it’s subsidizing it’s taken 552 but the borrower’s portion of the payments only 1941. there’s no real magic that’s happening here they’re paying for it up front with this 10 000. but it’s a night it’s a nice tool to you know sometimes people will want to put more money down on the house to save money on the monthly payment that doesn’t really do a whole lot you know ten thousand dollars financed over 30 years cost about 55 a month but if you take that 10 000 and do this temporary buy down it’s saving them 552 in year one but then eventually years 3 through 30 they’ll just pay that regular 24.93 payment but the thing is is a lot of people that we work with are projected to make more money in a few years than they make today you know i would think most people hope to make more money down the road than they’re making currently you know and a lot of people are the beauty of that is um if we can get the seller to pay it right yeah yeah and so you can see on this size of a loan here it’s basically a 500 000 loan this 10 000 is not too tough to get from a seller i think on a property that’s been listed for a little while but um on this particular one if you were asking the seller to pay for all of your buyers closing costs and prepaid expenses you’re talking about so this this one was 17 000 and then there’s a seller credit to offset that owner’s title policy so really this was about fifteen thousand five hundred dollars and closing costs plus the escrow account was about four thousand so you would need to ask your your um seller for if we wanted to round up just ask them for twenty thousand dollars seller credit and you can really do some cool stuff like this and you know help your buyer uh you know have a nice payment this payment here on the bottom right this is not so so really in year one the borrower the borrower’s payments 3081 minus this 552 so roughly it’s about twenty five hundred dollars and change would be your your clients uh in year one yeah that’s a nice little monthly payment that’s easy right yeah i mean you would think i mean i always use these condos that are apartments that are on 164th here in linwood people pay close to that much money for a two-bedroom apartment on one side the wildwood yeah the wild woods they do right it’s like four to five yeah i know exactly what you’re talking about yeah there’s there’s some newer ones that people pay a pretty penny for for yeah for that monthly we just talked about that those new uh alderwood uh ones that what terry what was that uh his son is looking at some crazy number like thirty two hundred for three bedrooms yeah thirty two 200 yeah in linwood bro very easy yeah that’s that’s a um you know 600 000 plus house but then there’s also that other like another one that was like six grand in that and then there’s like a few in edmonds too oh six grand yeah so anyways um i wanted to show you kind of what a temporary buy down looks like um and here’s the thing i i did one of these type of classes for for this linwood john scott office too and uh what i was telling them is if you have a client that has a pre-approval letter from another lender it probably it doesn’t really mean that much because the deal is let me show you this other flyer that we this is uh don’t worry that this i don’t know if you can read but this was named two one buy down but it’s not i don’t know why it says that this is a flyer we we were making for somebody it says the easy way to save money on your mortgage it says with a seller credit have the same payment as an 800 000 house so this this this one was a 900 000 sales price 20 down and we showed how um with now this is just the principle and interest but we showed with using a 20 000 credit we can buy the interest rate from 5.5 down to 4.5 well that that saved gosh that that doesn’t actually uh i’d have to take a look here and make sure that math works um this is a 700 uh dollar difference in payment let me just get my calculator real quick because lee made this one and i feel like that payment’s off but the bottom line is is we we did the math on it in a 20 or 20 000 seller credit with 20 down on this house it gave us a payment when we use that seller credit similar to that of an 800 000 house so if your client has a pre-approval letter that says they can only qualify for say 8 30 okay with 20 down well you could be looking at 900 000 houses they could qualify for a 900 000 house here you just got to get a seller credit to help you buy down the rate and all of a sudden your 830 000 pre-approval letter person is buying a 900 000 house and that’s basically because it’s a debt to income ratio that meets it’s it’s under because of that buy now what’s that is that because the debt to income ratio is under what they would have to afford with that buy down on a monthly basis yeah so like let’s say that they could only qualify for um let’s say it was a thirty five hundred dollar payment and the payment on a you know normal nine hundred thousand dollar house was going to be forty nine hundred dollars or something or five thousand dollars if we can use a seller credit we can get them under that forty five hundred dollar number and all of a sudden they’re buying a nine hundred thousand dollar house where you know if you just look at it at surface level with what they can qualify for they’re maxed out at like let’s say 8 30 or 8 20 or something like that because they can only go up to about 4 500 based on their income but we can do when you in this market it’s like we can do crazy things like with like like these seller credits like we can do some really fun stuff and help people um you know buy houses that they wouldn’t even think that they’d be able to afford with these seller credits so that’s what i was telling the agents in this office is like your your pre-approval letters don’t mean very much like because we can go much much higher um if we have a seller credit than what your letter says so that’s where it’s like there these seller credits it can be a real win-win for both the buyer and the seller you can attract way more buyers or more and more buyers can qualify for your home with a seller credit than you just lowering your price 20 000 bucks so it’s kind of hard to market that i would think but you know i’m just i’m just saying if you guys have pre-approval letters they don’t though the number that’s on there is not set in stone because we have seller credits that we can play with so essentially like then so our strategy for us we’re working with a buyer we’re gonna kick up the price range that our client asked about um and we’re gonna kind of like prepare them in two ways right so they’re gonna say hey jason that’s higher than what i said and i’m gonna explain to them okay well here’s the deal if we can find something that’s been on the market uh seven eight you know 10 days 14 days a month then you know the possibility of us negotiating you a seller credit increases and then maybe i can get you um you know enough money to get a point buy down in which case your payment will be the same on on this than uh what it was you know and if not if you really want to go for the stuff that’s fresh coming on the market then just make sure you’re looking at the price range that your pre-approval letter says yeah yeah yeah but yeah i mean we’re you know i’m seeing agents offering thirty thousand forty thousand bucks uh to buy down interest rate or they’re lowering i mean i mean you guys have probably had some of these where i’ve seen people lowering their price by a hundred thousand dollars it’s like you could do lower at 50 do do a 50 000 seller credit towards buying the rate down you know and and you know there’s there’s there’s some stuff that you can do where you can really you know do some fun stuff as far as buying buying down rates and helping people qualify that wouldn’t normally would be able to qualify for that property so it’s like that’s what i’m saying it’s like in the market that we had i don’t know for however many years it was before this market that we’re in now the pendulum was on the side of the sellers now it’s in this on the side of the buyers and we can do all kinds of crazy stuff like and um you know get big seller credits drop your in rates have already come back down quite a bit so it’s kind of like man it’s a nice sweet spot if you’re a buyer especially if you can get a seller credit you can you know do one of these tent buy downs or you can buy down a rate into the low to mid fours so and in low to mid fours even even where we’re at in the low fives right now this this flyer is a little bit old so that start that five and a half rates a little higher than what the rates are but um [Music]you know you can you can um you know these rates that were these rates that were we have right now if you looked at a chart over the last 50 years we are we are at the bottom almost like the chart would look like this it went it went down down down down down to where like during covet we were even below three percent and then it’s a little pop right here this is where we are but if you look at the chart it’s like this here’s where we are you know so the interest rates are still really good and if you can get a big seller credit to buy it down further and you’re getting a price that’s maybe 20 plus percent less than what they would have paid in say january um you know it’s a pretty good uh deal for your buyer i think it’s today is i’ve been saying this almost like you know right now is the best time that we’ve had this whole year to be a buyer the prices are down the rates are down and you’ve heard that that’s saying that i’m tired of hearing where people are saying uh marry the house and date the rate um but you know that is that is true though because they say what you know the the people that i follow um as far as interest rates go and what their forecast is is once this inflation gets under control these these mortgage rates will will come back a little bit for us so there’s a good chance if you have somebody that buys a house right now within the next couple of years i don’t want to guarantee it and i tell people this but i’m letting people know that the forecast is actually for these rates to come back once once we get this inflation under control um but there’s a good chance you’ll be able to refinance so if you really like this house you’re getting 20 30 off of it versus what you would have paid you know four or five months ago i mean what do you want you know anybody that’s been waiting you know this is a good time so question you know the answer to this i’m sure you have a rough guesstimate anyway let’s say we’re at a roughly you know eight hundred thousand dollar seven hundred fifty thousand our house sort of a you know more of a median price in our area unless i had um um you know fifteen thousand or whatever over the uh at what year does it make uh do i actually save more money by using that money to buy the rate down permanently versus temporarily so if i’m a more play-safe kind of person and i know i’m going to be in the house five years seven years uh what’s what do you think roughly on that um yeah there’s a lot of variables here so if you’re going to be in the house five to seven years as long as your break even on the permanent buy down you know is within you know less time than they need you know less time than when you think you’re going to be out of the house i don’t think it’s a bad move to do a permanent buy down if a break even’s four years down the road on a permanent buy down and you think you’re gonna be about seven years it’s not a bad move if somebody wants to do that the temporary buy down i would say it’s hard to even compare the temporary buy down with a permanent buy down because you’re not really all you’re doing on the temporary buy down it’s a tool to help you um lower your monthly payment um and how you know be able to sleep at night let’s just put it that way um and have a lower monthly payment and slowly graduate into your full monthly payment whereas that permanent buy down you’re actually spending you know you’re paying a fee to buy down the interest rate uh permanently it’s it’s it’s hard for me to compare because they’re two different things in your situation jason i i mean i would say that you can’t go wrong with a permanent buy down that breaks even before you’re going to sell if somebody not the temporary buy down is not for everybody not everybody like sees the value in that um but it just depends how important it is for you to have that payment relief in the first couple of years so sure and i get it and i i you know if i’m if i’m thinking yeah and some people are a little riskier and they’re like okay or you know i just really am confident that i am going to grow if i’m a younger person like yeah my income is going to grow or yes i’m pretty confident the rates will go down and i can refinance and sure i’m going to do that temporary buy down if i’m sort of like middle of the road i’m like i don’t know if i really buy all that um maybe i just like that that 30-year guaranteed lower rate so i just kind of curious at what point financially it makes more sense but i suppose it’s more of a mindset thing probably anyway i feel like it’s more of a mindset thing than than what makes the best financial sense i think that they both make sense um and you can’t go wrong doing either one so but um you know the where where you could go wrong is if you spent a bunch of money on something that had like a four or five year break even and interest rates come back in two years or a year and you spent all this money and you never hit your breakeven point then you wasted some money so it’s kind of a tough one um you know i would lean more towards paying less points if you can um being that you know supposedly and we can’t guarantee this the rates will come back here in a couple of years