Last week, we introduced the idea of a buyer’s market and shared two ways to save as a home buyer in 2023. Now, let’s pick up where we left off with a third way for home buyers to save money this year as well as some important insights for what’s to come in the real industry.
Save money with a temporary interest buy-down agreement
Another way to save is a temporary interest buy-down agreement. This is designed if you anticipate interest rates to decrease over the next one to three years and want the seller to pay for a few years of lower rate payments on your behalf. This agreement is negotiated between the seller and the buyer’s real estate agent during contract finalization. Essentially, the buyer enters into an agreement with the seller to charge the seller for the differing interest rate over an agreed-upon term. Upon termination of the agreement (either 12 months, 24 months, or 36 months), your normal payment resumes.
There are three available buy-down options: 1/0 buy-down, 2/1 buy-down, and 3/2/1 buy-down. Below, let’s consider an example of each one from Michael Dean, a branch manager for CrossCountry Mortgage in downtown Orlando who works closely with The Urban Dog Group.
1/0 buy-down
Say you have a loan of $250,000.00 with an interest rate of 7 percent. Your normal payment at 7 percent interest would be $1,663.26 per month. Your payment at 6 percent interest would be $1,498.87, resulting in a savings of $164.87 per month. If you multiply that savings by 12 months, it comes to $1,972.68. With this one-time seller credit, you could enjoy a lower payment for the first 12 months. After that, your normal payment of $1,663.26 per month resumes until you sell or refinance.
2/1 buy-down
Here, you have the same loan of $250,000.00 with an interest rate of 7 percent. Your year one payments would occur at a 5 percent rate and be $1,342.05, and your year two payments would occur at a 6 percent rate and be $1,498.88. Your normal monthly payment of $1,663.26 resumes at the start of year 3 (or the 25th month). That means, you’d save $321.20 per month for the first year and $164.39 per month during the second year. Your total savings would be $5,827.00, which would be provided to you as a one-time seller credit.
3/2/1 buy-down
Here, with the same loan amount, interest rate, and normal payment, buyers enjoy payments of $1,193.54 per month (4 percent) for the first year; $1,342.05 per month (5 percent) for the second year; and $1,498.88 per month (6 percent) for the third year. Their savings, then, amounts to $469.71 per month for the first year, $321.20 per month for the second year, and $164.39 per month for the third year. Total savings throughout the first three years equals $11,464.00, which the sellers pays as a one-time seller credit. Buyers enjoy a lower payment for the first three years, and the normal payment of $1,663.26 per month resumes at the start of year 4 (or the 37th month).
What’s to come for the housing market in 2023
When asked about the remainder of 2023, Michael anticipates a steady market with an ever-so-slight movement towards buyers gaining even more leverage. If you’re a home buyer this year, you can anticipate that rates will drop over the coming years; it’s just a matter of when. It’s important to note, though, that there’s a huge benefit of buying prior to this drop occurring. The moment those rates drop, home prices will begin to rise again. You can refinance your interest rate; you can’t refinance the price you paid. So the time to buy is before prices go back up and while buyers hold the leverage!
Be sure to have this discussion with your lender and realtor. Remember that they work in the current market every day and are your best sources for accurate information.
Let The Urban Dog Group help you with your real estate needs in 2023. Contact Christine Elias at caerealestate@gmail.com.