Interest rates are the topic in the real estate industry right now. Rates have significantly increased throughout 2022, and there is uncertainty ahead for the foreseeable future. The historically low-interest rates of the last few years, and really across the last decade, are now being looked at with a dose of perspective as home buyers are coming to grips with what is a new reality.
That new reality brings with it higher monthly payments and lower affordable price points. Overall, we still sit in what is a seller’s market for now, as the low inventory levels still remain problematic and still create a lack of balance, even with the reduced demand. Seems pretty doom and gloom, right?
There is a way to fight this problem and create a better situation. Not here to say that there is a way to buy a home now with an interest rate from 2021, but there are options available to position yourself with a lower interest rate in order to lessen the monthly mortgage expense and long-term interest paid overall.
The most common solution would be to buy down the rate by purchasing “points"
A point refers to 1% of the loan amount. Buying points or buying down the rate essentially means that you can pay the lender extra cash out of pocket at closing and in exchange, you will receive a lower interest rate for the life of the loan. This will in turn lower your monthly payment each month and significantly reduce the amount paid to the bank over the full term of the loan.
Every situation is case by case and nothing is set in stone, so please keep that in mind with these rough number estimates used in this example…On a $200,000 loan amount, buying 1 point in order to reduce your interest rate would cost $2,000. Paying that extra amount at closing may reduce your interest rate by around ⅜%, for example, and not a set number, and that would then reduce your monthly payment by approximately $80 per month, based on the current rates of around 7-7.5%. So that additional investment of $2,000 would essentially be paid off in a little over 2 years with that monthly savings realized. Now think of the savings over the full life of a 30-year loan.
Every buyer out there in the market moving forward needs to be aware of this option and crunch the numbers around it. In most cases, it will be an obvious tool to take advantage of. Plus, as the market continues to evolve and there is less competition for sellers to take advantage of, we will see more opportunities to use a seller concession to achieve this where the seller can front this expense to buy down the rate, rather than a buyer.
It is important to know that there are options out there to take advantage of. If interested in learning more please contact us directly!
