Las Cruces homebuyers can save thousands with a 3-2-1 mortgage

Mortgage interest rates continue their upward trajectory. According to an October 13 report from Freddie Mac, the 30-year fixed rate mortgage has risen to 6.92% – the highest level since April 2002 and more than double the rate of 3.05% posted there. a year. Because the 6.92 rate is reserved for borrowers who come to the table with more than 800 credit scores and at least 20% lower, everyone is paying in the low to mid range of 7% for the purchase and the refinancing of loans on their main residences, and even higher for loans to second homes and investment properties.

The rising rate cloud does have a positive side, however. Homebuyers and refinancers have a financing tool at their disposal that can save them thousands of dollars in interest charges. This is called a redemption. The product is available in two flavors, permanent and temporary. A permanent redemption reduces the interest rate for the duration of the loan. It is initiated by paying rebate points and is used by both home buyers and refinancers. One point is equal to one percent of the loan amount, with each point paid permanently reducing the rate by 1/8 to 1/4 percent.

The term buyout is designed to help homebuyers reduce their interest and corresponding payment for the first few years of their mortgage and is usually financed by the seller of the home they are buying. The most popular version is 3-2-1; which reduces the rate by 3% in the first year, 2% in the second year and 1% in the third year. 2-1 and 1-1 options are also available, along with other variations. Here’s how 3-2-1 works.

Gary Sandler

According to the folks at Gateway Mortgage in Las Cruces, a homebuyer financing a $250,000 30-year mortgage today at 7% would have a monthly principal and interest payment of $1,663.46. Buying the rate at 4% for the first year reduces the payment to $1,193.54. At 5% in the second year, the payment increases to $1,342.05. In the third year, the rate and payment increase to 6% and $1,498.88, respectively. The payout then reverts to $1,663.46 from years 4 through 30. Now, the mechanics.

A little known fact is that the rate never actually changes. In our scenario, 7% is the note rate for the full 30 years. The corresponding monthly P&I payment of $1,663.46 is also locked in for the full trip. So what does the lender or loan officer do when our buyer owes their first monthly payment of $1,663.46 but only pays the buyout payment of $1,193.54? The answer is nothing because the money is already in the lender’s account. It was put there by the seller at closing. The lender simply draws from the kitty each month to make up the required difference.

In order to secure the takeover, our buyer had to negotiate the price of the concession with the seller. Would the seller be willing to reduce his asking price by at least the $11,463.72 needed to fund the buyout? If so, he’ll probably be happy to fund the buyout instead — and he did.

Meet at closing time.

Gary Sandler is a full-time realtor and owner of Gary Sandler Inc., real estate agents in Las Cruces. He loves answering questions and can be reached at 575-642-2292 or [email protected].

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