2024 Climbing Interest Rates
Buyers are finding themselves in challenging times in the Arizona real estate market not only with massive price hikes, but with rising interest rates.
Perhaps you’ve been thinking, “hey, maybe it’s time we purchased our home in Prescott, Arizona” only to find out our average home price is over $685K! Perhaps the price of the home isn’t the issue, but instead the rising interest rates.
With interest rates pushing into the 8% territory this could mean pushing some people right out of the market. Why? Because the same person who could afford that 30-year fixed at 5% is paying $600+ more a month at 8%. ($400,000 loan with 10% down). These massive increases in not only monthly payments are high, but overall expense for the life of the loan are tremendous. Kind of makes you pine for the COVID days again, eh?
What is a 2:1 Buy-down?
A 2:1 buy-down is paying up front cash to the lender to reduce your interest rate during the first two years of the loan. Sometimes other deals can be worked also (called “buying down points”) but the purpose of the 2:1 buy-down is to offer relief for at least two years, during times of interest rate hikes. A 7% rate becomes 5% year-1, and 6% year-2. Hopefully by year 3, things have dropped again and the owner can now refinance.
Sellers can often offer this as an incentive for buyers who are trying to get into a home. Perhaps a buyer is well-qualified regarding credit score, but doesn’t have the financial girth to withstand a high interest rate yet. Maybe they’re just getting established in a new community and could use some help.
The double-dip
This is where things get interesting. Should a buyer have some extra cash on hand, they can request to buy down points. Should the home sell at $500,000, purchasing 1 point would cost $5K up front. So for $10K, a buyer could buy-down his rate from 7% to 5%. Now the seller decides to kick in money from the proceeds of the sale to contribute to a 2:1 buy-down. Now the interest rate drops to 3% the first year and 4% the second.
Is it worth during the 2:1 buy-down timeline?
Yes, if you have the cash, the buy-down is very much worth it. On a $500K home with an interest rate of 7.5% a combined 4-point buy down would take the payment from $3,500/month to $2,250/month, and a break-even date at 16 months…meaning you would recoup the $20,000 in buy-downs with the lower payment.
This strategy could put buyers back in the game! Working with a good agent who understands this and has connections in the lending industry is imperative during times of high interest rates.
Posted in: Lending, Mortgage, Moving to Prescott, Prescott, Prescott Valley
© Matt White - REALTOR® |