Summer is in full swing, and the housing market is heating up. August came and brought the lowest mortgage rates over the last fifty-two weeks. That celebration was brought to an abrupt halt as the stock market experienced the largest decline in one day since September 13th, 2022. With an election looming and all economic volatility displaying its full fangs, what can we expect to happen to mortgage rates as more Americans see their dreams of becoming a homeowner develop into a faint image growing more dim by the day?
Mortgage rates finally dipped into the high 6’s and with that comes the opportunity to save a little money on the cost of owning a home. Buying your mortgage rate down into the 5’s is now a realistic option for those that are willing to spend on the upfront expense of getting into a home. However, buying down the interest rate does not equate a one-point cost to a one percent reduction. There are regulations that outline the maximum amount a borrower is allowed to spend upfront on a rate buy down. Generally, a two-point (two percent of the total loan amount) buydown brings your rate down around anywhere from 0.500% to 1.500% depending on where the borrower qualifies for their par rate (rate with zero cost).
The costs benefit analysis of the rate buydown can be broken down into a monthly savings plan that will provide the optimal savings for a buyer. For example (hypothetical scenario), a $500,000 home loan at a par rate of 6.875% will generate a monthly principal and interest (P&I) payment of $3,285. Buying the rate down two points ($10,000) to an interest rate of 5.875% will give the homebuyer a P&I payment of $2,958. The $10,000 upfront buydown will give the homebuyer a monthly savings of $327 with a break even point of 31 months. So, the borrower will not begin saving $327 monthly until AFTER you make 31 payments towards your mortgage.
By this point in the social media world, everyone has heard or seen the phrase, “Date The Rate; Marry Your Home!” With all economic indicators suggesting that rates will continue to fall, why would anyone look to buy down their mortgage rate and increase their total closing costs in this market? The easiest solution is: requesting seller concessions. Every homeowner that has their home on the market may not provide seller’s concessions (money given to the buyers for use towards closing costs) but it is up to the buying agent to explain the benefit of requesting that money in their purchase agreement. Some buyers would rather see a price reduction on the home of $10,000, but in reality, it is more cost effective to pay the full listing price and request $10,000 to be used towards buying down your interest rate. A home listed at $625,000 would give the following scenarios: 20% down full asking price, $10,000 concessions used towards rate buydown, $500,000 loan amount at 5.875% P&I $2958; 20% down $10,000 price reduction ($615,000), $492,000 loan amount at 6.875% P&I $3,232.
The volatility in the mortgage rate market has kept a lot of buyers on the outside looking in. For buyers that are ready, qualified and can afford a home, BUY TODAY and refinance your home once rates go down. Those that are waiting for the rates to go down will find that the values of the homes will continue to increase as rates start to decrease. Always remember, the best time to buy a home is always, Yesterday!
Daniel Herrera is the Senior Mortgage Loan Specialist at Laser Mortgage. He can be reached at 714.878.3112 or [email protected]
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