Prior to selling real estate I worked in mortgage banking. During the Carter years I was approving loans when interest rates spiked to 18%. New loans were few and far between. Buyers were assuming loans, or when the loan could not be assumed they were doing wrap arounds – very convoluted and confusing and both topics for another blog post.
Due to lack of work, I transferred to the Joint Venture Department where Allstate Savings and Loan had a condominium project in Burbank. As my S & L joint ventured with the builder, we had a bit more flexibility with interest rates. But not enough to make the homes affordable. So the builder participated by hiking the price and offering a 3/2/1 buy down. We (Allstate Savings & Loan) offered the condos at something like 14% interest rate the first year, 15% the second year, 16% the third year then 17% for the life of the loan.
Today’s modest interest rate increase is nothing compared to the crazy interest rate spike of the 80’s. But as affordability continues to dwindle for Los Angeles real estate buyers, will interest rate buy downs again be desired?
Buy Down defined: Buying down the interest rate (paying points) simply means that you are paying an extra fee in order to obtain a lower interest rate. A point is 1% of the loan amount. One point on a million dollar loan is ten thousand dollars. Some home buyers pay additional points because their accountant may decide they need the write off for that tax year (discuss with your accountant).
A recent phone call with Floyd Walters owner of La Canada’s BWA Mortgage revealed some loose examples. (Please contact your lender or Floyd @ 818 952-2726 for exact interest rates and terms).
Assume a $636,150 loan (the new Freddy Mac high limit conforming loan amount). At 0 points, the interest rate would be 4.375% with a principal and interest payment of $3176.
At ½ point ($3,181) the interest rate would be reduced by 1/8th% to 4.25%; with a payment of $3129. A $47 monthly savings – after 68 months you would recoup $3196.
A 3 point ($19,085) buy down would get you a 3.875% rate with a payment of $2990. A $186 monthly savings – after 102 months you would recoup $18,972.
The best way to determine if you should fund your own buy down (pay additional points) is to factor in your month savings versus your additional outgo. How many months will it take for you to recapture your initial interest rate buy down? A buy down is not for you if you don’t plan on keeping the loan for a long period. Sometimes homeowners refinance to cash in on equity. When interest rates drop many refinance to obtain a lower interest rate.
Questions about loans call Floyd, questions about real estate call Phyllis @ 818 790-7325.
