2-1 Rate Buydowns

Next week I’ll be writing about purchasing in this market.  Like in any market, there is a lot of diagnosis needed to understanding your specific situation and whether it makes sense to buy now or wait.

The highlights for Palm Beach and Martin Counties are still the same. Palm Beach County has a projected population increase of 7,200 + household gains per year conservatively over the next decade.  That’s 18,000 net gain of people a year.  Builders have slowed building and there isn’t anywhere to build in mass anymore east of 95 and the Turnpike.  So, the lack of supply has become more dire. On top of that residents with a mortgage in the area don’t want to give up that 3% interest rate so fast. Therefore, supply increases are limited to more “must sellers” or people downsizing/making bigger jumps in property size, job transfers etc.

If you think there will be big drops in property prices in our area, think again. There just isn’t the supply of land available or the residents buying investment property that occurred in 2005. Totally different situation.  Look outside today.  High of 83 degrees, low of 77 degrees.  Palm Trees. Shorts. The beach is within minutes of your house.  PBI not too much farther away..  Between the restaurants, golf, fishing, pickleball, clubs, Wall Street South, shopping, Kravis Center, Maltz, Lifetime Fitness (check that investment out), infrastructure of friends and family…. we are too much of an outlier. Chicago today has a low of 46 degrees. Buffalo will hit 53 degrees. Move there and you’ll see some price movement.  We are looking more at staying even to maybe 10% reductions for homes that are not updated or have problem locations and floor plans. However, add 8% for inflation and the real price is going down because of inflation (because its not jumping up 8%.)

There is a ton more to this discussion and I’ll write about some of the opportunities and risks in-depth next week.

However, one strategy that can be adopted to defeat high rates is a 2-1 Rate Buydown.  The 2-1 temporary buydown gives buyers a lower rate and lower monthly payments for the first 2 years of their loan. The seller provides the savings so there’s no cost to the buyer.  Here is how it works and the savings…

Example:

Sale price $650,000

Down payment $130,000

Loan Amount $520,000

30-year fixed rate 7%

Annual percentage rate $7.05%

The lower initial mortgage payments funded by an up-front deposit paid by the seller.

As long as the house appraises out, a seller can give a concession. So instead of just lowering the price to negotiate the deal, the seller gives a concession.  The seller is basically prepaying the interest for the first 2 years of the loans.

The good part of this is that it isn’t an ARM (Adjustable Rate Mortgage).  If rates drop in a few years, the buyer can refinance down to the lower rate.

A buyer just needs to be aware that while this is a real saving, there is no guarantee that rates will drop. Therefore, the buyer needs to make sure that they can afford the interest rate on a long-term basis. There are proper disclosures and addendums that are needed so please consult with us and a good local mortgage broker (Ryan Brown with Cross Country helped me with this) for more information.

Jeff Lichtenstein is owner and broker of Echo Fine Properties, a luxury real estate brokerage selling real estate in Jupiter  and homes in Palm Beach Gardens, Florida. He has 20 years of real estate experience, has closed over 1,000 transactions, and manages over 70 agents in a non-traditional model of real estate that mimics a traditional business model.  Some publications he has been quoted in.

Feel free to ask him a question directly at jeff@EchoFineProperties.com including a complimentary real valuation of your home.