How a temporary interest buyback can help lower home payments – Orange County Register

Not long ago, a pandemic-driven spending spree allowed real estate agents and their home sellers to command top dollar and then some.

It wasn’t uncommon to hear sellers asking buyers to waive the rating contingency (standard language in the home purchase agreement). Or forgo potentially expensive repairs that a home inspector might spot after the buyer signs on the dotted line. Or waive the credit approval contingency. Waive. Waive. Waive.

Whatever the buyer waives upfront could mean he or she risks losing the (usually) 3% deposit (of the sale price) if the buyer is unable or unwilling to complete the sale.

Today the shoe is on the other foot. Homebuyers have their own high-minded demands, such as B. Asking sellers to pay for repairs or termite problems. And oh yes, pay all closing costs. Counting. Counting. Counting.

They can even ask a seller to help them pay the rising interest rates.

Why and how you ask?

Fixed-rate mortgages have more than doubled in the last nine months, making fixed-rate payments painfully higher and less affordable. This week, Freddie Mac’s average 30-year fixed rate is 6.66%, compared to 3.22% on Jan. 6. As a result, home sales have slowed and median home prices are flattening.

Mortgage lenders are bringing back a sometimes popular lending program used in times of rising interest rates. Referred to as a 2-1 buydown, or temporary buydown, it’s a way to lower interest rates and then the buyer’s mortgage payment for the first two years — ideally at the seller’s expense.

Here’s how it works: Suppose you get a 30-year fixed interest rate with no points at 6.625%. In a 2-1 buydown, your principal and interest payments would be 4.625% for the first 12 months and 5.625% for the second 12 months. After the first two years, the interest rate increases to 6.625% for the remainder of the 30-year mortgage.

With a loan balance of $600,000, the first year principal and interest payment at 4.625% would be $3,085. The second year principal and interest payment at 5.625% would be $3,454. The third year principal and interest payment and the remainder of the loan would be $3,842.

The cost for the first year is 12 x $757 or $9,084 (difference between 4.625% monthly payment of $3,085 and 6.625% or $3,842). The cost for the second year is 12 x $388 or $4,656 (difference between 5.625% monthly payment of $3,454 and 6.625% or $3,842). The total buydown cost is $13,740 or 2.3% (points) of the loan amount.

How is this paid for? The effective interest rate in the early years of the mortgage is reduced by depositing a lump sum, sometimes called a subsidy. Fannie Mae’s policy is that these prospect contributions, or IPCs, may be paid by the real estate seller, the borrower’s employer, the mortgage lender, the borrower, or other interested parties (e.g., real estate agents).

This grant goes into an escrow account controlled by the loan servicer. The account balance is reduced each month as the subsidy is added as part of the temporarily reduced monthly mortgage payment.

The borrower must qualify at the 6.625% interest rate.

Let’s say you have an acceptable seller offer, such as paying all of the buyer’s usual closing costs of $6,000. Termite and other repairs run to $5,000. And don’t forget the acquisition cost of $13,740. This makes a total of $24,740.

For a primary or secondary home, the maximum IPC is 9% of the sale price (not the loan amount) when the buyer pays a minimum 25% deposit. It drops to 6% IPC when the deposit is less than 25% or even as low as 10%. The IPC drops to 3% if the buyer sells less than 10%. Also, the IPC is capped at 2% on purchases of investment property.

In the example above for a $600,000 loan amount, the allowable IPC would work mathematically if the borrower paid back at least 10% on a self-occupied purchase. If it is less than 10% down or an investment purchase, totals are above Fannie Mae limits. The seller can contribute up to the limit, but no more.

I think a recession is very likely next year. What if mortgage rates fall within the next two years and you want to refinance at a lower rate?

Any remaining subsidy balance is owned and credited to the borrower, reducing the payout balance by the remaining subsidy amount. For example, the remaining loan balance is $575,000. The subsidy remaining in escrow is $5,000. The settlement of the withdrawal request would show a loan balance of $570,000.

But what if house prices fall too? Can you still refinance? Maybe.

When refinancing, the loan-to-value ratio is the result of dividing the loan balance by the current property value. Fannie allows refinancing up to 95% loan-to-value. Less equity potentially means more pricing for lenders, known as loan-level pricing. And there’s a chance you’ll have to pay for mortgage insurance or a higher amount of mortgage insurance if your loan balance falls below 80% of the Mortgage Lending Value.

“While we’re seeing a slowdown in appreciation, we don’t see big falls in value (coming),” said Don Chiesa, senior vice president at Rocket Mortgage. (Full Disclosure: My company Mortgage Grader is a Rocket customer.)

Freddie Mac evaluates news

The 30-year fixed rate bond has averaged 6.66%, down 4 basis points from last week. The 15-year fixed rate averaged 5.9%, down 6 basis points from last week.

The Mortgage Bankers Association reported a 14.2% drop in mortgage applications from the previous week.

bottom line: Assuming a borrower receives the average 30-year fixed rate on a conforming loan of $647,200, last year’s payment was $1,434 less than this week’s payment of $4,159.

What I see: Locally, well-qualified borrowers can obtain the following one-point fixed rate mortgages: 30-year FHA at 5.5%, 15-year conventional at 5.75%, 30-year conventional at 6.25%, 15-year conventional High Balance ( $647,201 to $970,800) at 5.99%, a 30-year High Balance conventional at 6.5%, and a Jumbo 30-year purchase, fixed at 6%.

Note: The 30-year FHA-compliant loan is limited to loans of $562,350 in Inland Empire and $647,200 in LA and Orange counties.

Eye-catcher rental program of the week: A 30-year 2-1 temporary buydown-compliant fixed-rate mortgage locked at 3.99% in the first year with two points in expense and 2.22 payout points.

Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or jlazerson@mortgagegrader.com.