Combatting Current Mortgage Rates W 2/1 Buy Down

In the ever-shifting landscape of the mortgage market, who you work with can make all the difference. So, I'm here with my esteemed colleague, Libby, a former co-worker from my days as a lender at Movement Mortgage. We're diving into the current market conditions, and yes, that dreaded four-letter word – "rate." Let's see what Libby has to say about the state of the market.

The Rise of Rates

The first thing that's been causing quite a stir in the mortgage world is the soaring interest rates. These rates have skyrocketed to levels we haven't witnessed in years. We're talking about rates that used to hover around two, three, and maybe even four percent. But alas, that's not where we find ourselves today. Presently, we're looking at rates in the mid-sixes, and that's for those with perfect credit scores.

So, what does this mean for you? Well, if you've recently refinanced and are sitting comfortably at a 2.75% rate, selling your home and maintaining a similar monthly payment without a significant drop in the purchase price can be quite the challenge.

The Challenge of Sticker Shock

It's what we call the "sticker shock." You see, with rates this high, some homeowners are hesitant to sell because they can't find a new place with the same favorable rate. Who wants to see their monthly expenses soar? That's where creativity comes into play.

Creative Solutions to Combat High Rates

Now, let's talk about some creative ways to tackle the rate issue. Libby isn't a big fan of spending a fortune on a rate buy-down. After all, the hope is that you might have a chance to refinance within the next couple of years. If you spend a hefty sum to reduce your rate from 6.4% to 5.5% and then refinance, you've essentially kissed that money goodbye.

So, what's the alternative? Enter the "2-1 buy-down" strategy. This is an intriguing option that comes with three points of interest. Imagine your starting rate is 6.5% in year one, but with the 2-1 buy-down, you can bring it down to 4.5% for the first year. In year two, it edges up slightly to 5.5%, which is still considerably better. Then, in year three, it reverts to the original rate of 6.5%, assuming you haven't refinanced by then.

What's fantastic about this approach is that it's not free – it costs three points of interest. In practical terms, that's about three percent of the loan amount. So, for a loan of, say, $400,000 or $500,000, we're looking at an investment of $10,000 to $12,000. It's not chump change, but it's a lifeline if you find yourself stuck with a 2.75% rate and are transitioning to a 6.5% rate.

And here's the kicker: if you're a bit uneasy about the new monthly payment, you can manage it by setting aside some prepaid interest. This isn't money down the drain. It's merely stashing away prepaid interest in an interest-bearing escrow account. If you end up refinancing within, say, nine months, that money comes back to you, no harm done.

So, when life hands you high mortgage rates, it's time to get creative. The 2-1 buy-down strategy could be your ticket to a more manageable monthly payment, all without breaking the bank.

In the world of mortgages, it pays to think outside the box, stay informed, and work with experts like Libby, who have seen it all. When the tides of the market shift, it's those who adapt creatively that stay afloat.