The holiday season is upon us, and you may be thinking about finding a special or unique gift your family member or loved one could use for years to come. In my previous article entitled, “Part 1: Home for the Holidays – Gift Giving to First-Time Home Buyers,” I discussed gifting down payment funds or First-Time Homebuyer Savings Account (FHSA) contributions to first-time buyers to help purchase their new home. In this article, I will discuss another way you can help a home buyer.
Interest rates have been rising this year, even though they are still relatively low, historically speaking. However, as interest rates go up, a homebuyer’s purchasing power is reduced. An exceptional gift idea is helping your relative or loved one with an interest rate or mortgage buydown. Buying down an interest rate means buying points, which then lowers the interest rate, resulting in a lower monthly mortgage payment.
This can make the difference between whether a buyer can afford a home or not — and in the case of a permanent mortgage buydown, it can mean savings in monthly mortgage payments for years. The longer the new homeowner is planning on staying in the home, the more the long-term mortgage savings there will be.
There are a variety of mortgage buydowns, but I want to touch on the 3-2-1 temporary buydown as well as the permanent mortgage buydown. Market forces do apply here, so be sure to consult your mortgage lender for availability and pricing.
A 3-2-1 temporary buydown is simply that. You pay more at the closing to reduce the mortgage rate over the first three years of the repayment term. The rate will be reduced by 3% under the locked-in rate the first year, 2% lower the second year, and 1% lower the third year. For example, if the market interest rate is 6%, the rate would be 3% the first year, 4% the second year, 5% the third year, and 6% for the remaining 27 years. This can really help someone get into a home who is anticipating pay raises as they advance in their career. The pricing for a mortgage buydown like this is usually just the difference from what the payment should be and what the amount of the payment actually being made is.
The permanent mortgage buydown could be very beneficial to a homebuyer who is planning on staying in their home for several years. This type of buydown entails buying points for the entire life of the loan.
Mortgage buydown pricing is market driven so a mortgage lender needs to be consulted for today’s pricing. However, buydown pricing might look something like this:
Interest rate of 6.25% – 0.00 par rate
6.125% – 0.25% of loan amount to buy the rate to 6.125%
6.00% – 0.50% of loan amount to buy the rate to 6.00%
5.875% – 1.00% of loan amount to buy the rate to 5.875%
5.75% – 1.75% of loan amount to buy the rate to 5.75%
On a $400,000 mortgage, the numbers would be as follows:
$400,000 loan, 6.25% interest, monthly payment is $2,462.87.
Pay 1.75% of the $400,000 to buy the rate to 5.75%, creating a monthly payment of $2,334.29 and a monthly savings of $128.58.
1.75% = $7,000 divided by monthly savings of $128.58= 54 months to stay in the house to break even.
In this example, a gift of $7,000 would lower the monthly payment by $128.58, but the true long-term savings every month will accrue once the buyer stays in the home beyond 54 months.
Be sure to consult your financial planner, accountant, mortgage loan officer, and Realtor to create a plan that is just right for your situation!
By Duane Duggan. Duane has been a Realtor for RE/MAX of Boulder since 1982. Living the life of a Realtor and being immersed in real estate led to the inception of his book, Realtor for Life. For questions, e-mail [email protected], call 303.441.5611 or visit boulderco.com.