Higher interest rate environments can make it difficult to buy a home, but there are silver linings and workarounds. The good news is that higher interest rates often mean less competition, lower prices, and eager sellers. These sellers can be more willing to consider concessions than they would have been in a hotter market. Today you may be able to negotiate who pays for many closing costs, including mortgage discount points.
There’s an alternative to buying points, however, that homebuyers should understand. It can significantly lower the interest rate on your mortgage payment for the first several years of the mortgage. It’s called a 3-2-1 buydown, and it can help combat these higher interest rates.
A 3-2-1 buydown temporarily lowers the interest rate on your mortgage by 3 percentage points the first year, 2 percentage points the second year, and 1 percentage point the third year. After that time, your mortgage will revert to the original rate.
This is a huge deal with interest rates at their current levels. Suppose you lock in your mortgage with the annual percentage rate (APR) at 6%. If you purchased a 3-2-1 buydown mortgage, your rate would be 3% in year one, 4% in year two, and 5% in year three, wrapping up with the agreed-upon 6% note rate for the remainder of the loan term.
This program was created to give buyers a little breathing room when higher interest rates threaten to derail their dream of homeownership. A 3 percentage point difference in your mortgage loan can make a significant impact on your monthly payment.
This program can also free up cash at a critical time after you purchase a home. Remember that a down payment, closing costs, and moving expenses can be very expensive. The money you save with temporary buydowns such as a 3-2-1 buydown can replenish the savings or emergency fund that you might have exhausted to pay for these expenses.
Your savings can also be put toward furniture purchases or repairs and upgrades for your new home. You don’t want to max out your credit cards on these items, which negatively affects your credit score. Instead, put the money you’re saving to work for you.
Three years is a long time in the mortgage industry. You’ve seen how quickly the daily and weekly mortgage rates can change. The 3-2-1 buydown can get you through the current interest rate hike, but it can also position you to refinance after the program ends in three years. At that time—as long as your home equity is at least 20%—you can consider refinancing to a lower permanent rate.
This is assuming that 30-year fixed rate mortgages will be lower at that time, although no one knows what the Federal Reserve will do three years from now. If rates do increase, you’re still ahead of the game with the mortgage rate you originally locked in.
This makes a 3-2-1 temporary buydown a win-win for homebuyers!
A 3-2-1 buydown can be paid for by the seller, homebuilder, or even the mortgage lender. This is a popular concession among sellers who are eager to sell for one reason or another. It often allows them to achieve the full asking price on their home, while also incentivizing buyers to invest in real estate.
The difference between 3-2-1 temporary buydowns and discount points all comes down to rate and timing. You know you’ll get to chop entire percentage points off your interest rate during the first three years of your loan term with the 3-2-1 buydown. Permanent buydowns such as discount points, on the other hand, lower your rate by a smaller amount—generally 0.125 to 0.5 percentage points—for the entire life of the loan.
Here’s where you need to weigh your options. Naturally, that 3 percentage point APR savings is an attractive benefit, but saving half a percentage point on a 30-year fixed rate mortgage is valuable, too. That equates to a lot of savings over time.
Buying mortgage points can be the way to go if you plan to stay in your home a long time, because you want to make sure you achieve your “breakeven.” This is the point at which the money you’ve saved on the permanent interest rate discount outweighs the upfront costs you (or the seller) paid for that discount. This breakeven is generally achieved around year five of your home loan.
An additional item to consider is how comfortable you are with the interest rate you’re locking in. You want to make sure this is an interest rate you can live with after the three-year period on a 3-2-1 buydown ends, because it will be your permanent mortgage rate for the remaining years of the loan. The option to refinance as long as you’ve built up enough home equity is available, but there’s no guarantee that rates will be low enough to count on that.
Taking all this into account, the 3-2-1 buydown is still a very attractive option for buyers when interest rates are high.
We know these are important decisions, which is why APM is always here to walk you through them. We can explore the various scenarios with you, outlining how much you’d save with each option: Call APM today to get started.
Karen Jones, a Licensed Mortgage Loan Officer (NMLS 307015), is located in Scottsdale and has been serving Arizona with their home lending needs for over 40 years. As a Certified Mortgage Advisor, Karen is dedicated in ensuring that her clients are well educated and prepared for their new home loan decision. AmeriFirst Financial is a division of American Pacific Mortgage Corporation and her office is located in Scottsdale, Arizona.
AmeriFirst Financial is a division of American Pacific Mortgage Corporation. The views, articles, postings and other information listed on this website are personal and do not necessarily represent the opinion or the position of American Pacific Mortgage Corporation.
:// Karen Jones is a licensed loan originator at AmeriFirst Financial. Karen Jones complies with all regulations and rules of all government agencies and regulators including the Real Estate Settlement and Procedures Act. The services provided by Karen Jones are not a condition, nor do they create any obligation for any form of remuneration for any real estate settlement service related to any referral.
The 2/1 Buydown is an awesome buying strategy to use during an inflationary economy. However, one needs to be very strategic in its' use. Like everything in life, there is a wrong and a right way of using this strategy when buying your home.
Inflation is arch enemy of mortgage interest rates and that is why buying power decreases during inflationary times as the cost of the loan is higher making the payments higher. However, since a mortgage can be refinanced, the 2/1 buydown is a great way to make payments more affordable for the first few years while waiting for inflation to improve.
Historical data tells us that when inflation improves so does the cost of goods and services, including mortgages. Therefore, once inflation does improve you can refinance to a lower interest rate, thus saving money for the entire term of the loan and not just for the first few years.
Want to learn more about the history of inflation? Here is an article from the Federal Reserve that gives a historical account of The Great Inflation that troubled the United States from 1965 to 1982.
Karen Jones, a Licensed Mortgage Loan Officer (NMLS 307015), is located in Scottsdale and has been serving Arizona with their home lending needs for over 40 years. As a Certified Mortgage Advisor, Karen is dedicated in ensuring that her clients are well educated and prepared for their new home loan decision. AmeriFirst Financial is a division of American Pacific Mortgage Corporation and her office is located in Scottsdale, Arizona.
AmeriFirst Financial is a division of American Pacific Mortgage Corporation. The views, articles, postings and other information listed on this website are personal and do not necessarily represent the opinion or the position of American Pacific Mortgage Corporation.
Karen Jones is a licensed loan originator at AmeriFirst Financial. Karen Jones complies with all regulations and rules of all government agencies and regulators including the Real Estate Settlement
The 2022 housing market has been defined by two key things: inflation and rapidly rising mortgage rates. And in many ways, it's put the market into a reset position.
As the Federal Reserve (the Fed) made moves this year to try to lower inflation, mortgage rates more than doubled – something that’s never happened before in a calendar year. This had a cascading impact on buyer activity, the balance between supply and demand, and ultimately home prices. And as all those things changed, some buyers and sellers put their plans on hold and decided to wait until the market felt a bit more predictable.
But what does that mean for next year? What everyone really wants is more stability in the market in 2023. For that to happen we’ll need to see the Fed bring inflation down even more and keep it there. Here’s what housing market experts say we can expect next year.
Moving forward, experts agree it’s still going to be all about inflation. If inflation is high, mortgage rates will be as well. But if inflation continues to fall, mortgage rates will likely respond. While there may be early signs inflation is easing as we round out this year, we’re not out of the woods just yet. Inflation is still something to watch in 2023.
Right now, experts are factoring all of this into their mortgage rate forecasts for next year. And if we average those forecasts together, experts say we can expect rates to stabilize a bit more in 2023. Whether that’s between 5.5% and 6.5%, it’s hard for experts to say exactly where they’ll land. But based on the average of their projections, a more predictable rate is likely ahead (see chart below):
That means, we’ll start the year out about where we are right now. But we could see rates tick down if inflation continues to drop. As Greg McBride, Chief Financial Analyst at Bankrate, explains:
“. . . mortgage rates could pull back meaningfully next year if inflation pressures ease.”
In the meantime, expect some volatility as rates will likely fluctuate in the weeks ahead. If we see inflation come back under control, that would be good news for the housing market.
Homes prices will always be defined by supply and demand. The more buyers and fewer homes there are on the market, the more home prices will rise. And that’s exactly what we saw during the pandemic.
But this year, things changed. We’ve seen home prices moderate and housing supply grow as buyer demand pulled back due to higher mortgage rates. The level of moderation has varied by local area – with the biggest changes happening in overheated markets. But do experts think that will continue?
The graph below shows the latest home price forecasts for 2023. As the different colored bars indicate, some experts are saying home prices will appreciate next year, and others are saying home prices will come down. But again, if we take the average of all the forecasts (shown in green), we can get a feel for what 2023 may hold.
The truth is probably somewhere in the middle. That means nationally, we’ll likely see relatively flat or neutral appreciation in 2023. As Lawrence Yun, Chief Economist at the National Association of Realtors (NAR), says:
“After a big boom over the past two years, there will essentially be no change nationally . . . Half of the country may experience small price gains, while the other half may see slight price declines.”
The 2023 housing market is going to be defined by mortgage rates, and rates will be determined by what happens with inflation. The best way to keep a pulse on what experts are projecting for next year is to lean on a trusted real estate advisor. Let’s connect.
Karen Jones, a Licensed Mortgage Loan Officer (NMLS 307015), is located in Scottsdale and has been serving Arizona with their home lending needs for over 40 years. As a Certified Mortgage Advisor, Karen is dedicated in ensuring that her clients are well educated and prepared for their new home loan decision. AmeriFirst Financial, Inc. Grayhawk Office located in Scottsdale, Arizona.
The information contained, and the opinions expressed, in this article are not intended to be construed as investment advice. Karen Jones does not guarantee or warrant the accuracy or completeness of the information or opinions contained herein. Nothing herein should be construed as investment advice. You should always conduct your own research and due diligence and obtain professional advice before making any investment decision. Karen Jones will not be liable for any loss or damage caused by your reliance on the information or opinions contained herein.
Karen Jones is a licensed loan originator at AmeriFirst Financial. Karen Jones complies with all regulations and rules of all government agencies and regulators including the Real Estate Settlement
2022 has been a tough year for the real estate industry and I have been sharing with all of the agents that I know that investing in themselves and their marketing tools is one of the best uses of time when business has slowed down.
And the most important use of time is talking to as many people as you can:
It is a fact that a record number of real estate agents joined the industry in the last two years and a record number of agents will leave in 2022–2023. Most agents will complete fewer transaction sides in 2022 than in 2021. This is a cyclical industry — there is no way to avoid the ups and downs.
But it’s also a cyclical industry with an upward trend. The US population is growing at roughly 0.5% (half a percent) per year. That’s 1.7 million people added per year. We’ve also got a decade-long boost from millennials hitting typical home buying age. I have zero doubt that we will be back above 5 million existing homes sold in 2024.
The most important thing you can do right now is to invest in yourself, your network and your marketing. Read all those real estate books that you bought but never got around to reading. Support your communities. Spruce up your marketing tools and skills. Get smarter on aspects of the business that you don’t fully understand. Make your 2023 business plan your most thoughtful and ambitious ever. Most importantly: talk to as many people as you can.
As a Marketing Coach and Lender, I have shared this message with every agent that I talk with and I am taking my own advice. If you would like to learn some new skills that have proven track records, let me know. I would be happy to share the knowledge with you to make 2023 one of your best years yet!
Strategy4SuccessNow
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Scottsdale, AZ 85260
karen@strategy4successnow.com
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