How a Temporary Rate Buyback Can Help Lower House Payments – Orange County Register

It wasn’t too long ago that real estate agents and their door-to-door sellers could hit top dollar, and then some thanks to a pandemic-fueled buying spree.

It was not uncommon to hear sellers asking buyers to waive the appraisal contingency (standard language in the residential purchase contract). Or forego potentially costly repair contingencies that a home inspector might uncover after the buyer signs on the dotted line. Or waive the possibility of loan approval. Give up. Give up. Give up.

Regardless of the buyer’s initial waiver, they risk 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 demands, such as asking sellers to pay for repairs or pay for termite issues. And oh yes, pay all closing costs. Pay. Pay. Pay.

They can even ask a salesperson to help pay off the rising interest rates.

Why and how, you ask?

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

Mortgage lenders are bringing back a sometimes popular loan program used during times of rising interest rates. Called 2-1 buyout or temporary buyout, it’s a way to lower interest rates and subsequently buyers’ mortgage payment for the first two years – ideally at the seller’s expense.

Here’s how it works: Let’s say you can get a 30-year fixed rate with no points at 6.625%. A 2-1 buyout would have a principal and interest payment of 4.625% for the first 12 months and 5.625% for the following 12 months. After the first two years, the interest rate increases to 6.625% for the remaining term of the 30-year mortgage.

On a loan balance of $600,000, the principal and interest payment at 4.625% for the first year would be $3,085. The second year principal and interest payment at 5.625% would be $3,454. The principal and interest payment for the third year 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 a monthly payment of 4.625% of $3,085 and 6.625% or $3,842). The cost for the second year is 12 x $388 or $4,656 (difference between the monthly payment of 5.625% of $3,454 and the monthly payment of 6.625% or $3,842). The total redemption cost is $13,740 or 2.3% (points) of the loan amount.

How is this paid? The effective interest rate during the first years of the mortgage is reduced due to the deposit of a lump sum of money, sometimes called a grant. Fannie Mae guidelines state that these Interested Party Contributions or IPCs may be paid by the seller of the property, the borrower’s employer, the mortgage lender, the borrower, or other interested parties (e.g. real estate agents ).

This grant is paid into an escrow account controlled by the loan officer. 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 for the interest rate of 6.625%.

Say you have a pleasant seller who offers to pay all of the buyer’s regular closing costs of $6,000, for example. Termite and other repairs are $5,000. And don’t forget the buyout costs of $13,740. This amounts to a total of $24,740.

For a main residence or a secondary residence, the maximum CPI is 9% of the sale price (and not of the amount of the loan) when the buyer pays a deposit of at least 25%. It drops to 6% CPI when the down payment is less than 25% or as low as 10%. The CPI drops to 3% when the buyer bets less than 10%. In addition, the CPI is limited to 2% on any purchase of investment property.

In the $600,000 loan amount example above, the qualifying CPI would work mathematically if the borrower put at least 10% down on a home purchase. If it is a down payment of less than 10% or an investment purchase, the totals exceed Fannie Mae’s limits. The seller can contribute up to the limit but not more.

In my opinion, a recession is very likely next year. What if mortgage rates drop over the next two years and you want to refinance at a lower rate?

Any remaining grant balance is held and credited to the borrower, reducing the repayment balance by the remaining grant amount. For example, the remaining loan balance is $575,000. The grant remaining in the escrow account is $5,000. The payment request status would show a loan balance of $570,000.

But what if house prices also go down? Can you still refinance? Maybe.

When refinancing, the loan to value ratio will be based on the loan balance divided by the current value of the property. Fannie allows refinances up to 95% LTV. Less equity potentially means more lender pricing hits called loan-level pricing adjustments. And you may have to pay mortgage insurance or a higher amount of mortgage insurance if your loan balance falls below 80% of the loan-to-value ratio.

“While we are seeing a deceleration in appreciation, we don’t see big declines in value (coming),” said Don Chiesa, senior vice president of Rocket Mortgage. (Full disclosure: My Mortgage Grader firm is a Rocket client.)

Freddie Mac Rate News

The 30-year fixed rate averaged 6.66%, 4 basis points lower than last week. The 15-year fixed rate averaged 5.9%, 6 basis points lower than last week.

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

At the end of the line : Assuming a borrower gets 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 fixed rate mortgages with a single point: A 30-year FHA at 5.5%, a 15-year conventional at 5.75%, a 30-year conventional at 6, 25%, a conventional 15-year high balance ($647,201 to $970,800) 5.99%, a conventional 30-year high balance at 6.5% and a buy 30-year jumbo fixed at 6%.

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

Eye-catching loan program of the week: A temporary 2-1 buyout over 30 years in accordance with the fixed mortgage purchase locked at 3.99% for the first year with a cost of two points and 2.22 points of subsidy.

Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or [email protected]

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