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Rates, Inventory and Buy Downs

Happy Thursday – I hope you are doing well. Rates are going back up again due to inflation. We were hoping rates would be dropping by now, but the CPI, employment and retail data are showing the economy is not slowing down just yet. We still believe rates will go down this year, but no one knows for sure how soon that will happen. Based on this, I want to talk about how and when you can use a 2/1 or 1/0 buy down.

The 2/1 and 1/0 buy down are great options when rates are going up. For the 2/1 buydown, your rate is 2% lower the first year, 1% lower rate the second year and back to market rate the third year. For the 1/0 buy down, your rate is 1% lower rate the first year and back to market rate the second year. Many of our clients have been able to take advantage of these and will hopefully be able to refinance before their rate goes up in year 2 or 3. The cost of the buy down works out to be roughly 2.25% of the loan amount for the 2/1 buy down and .75% of the loan amount for the 1/0 buy down. Therefore, on a $400k loan the 2/1 buy down would cost around $9k and it would cost around $3k on the 1/0 buy down.

However, the issue with the buydowns is the seller must pay the cost for the buy down. So, in a low inventory market this is harder to negotiate. When you are in a situation where you are competing for the property, it is hard to get the seller to pay any closing costs. This is why having a great buyer’s agent is one of the most important things you can do when buying a home. The agent will help you decide when you can use the buy down and when you can’t. Knowing when to use this option can help save you money and knowing when not to use it can help you win your offer.

As always, please let me know if you have any questions or if there is anything else we can do to help.

Stewart Sadler

Managing Partner

Cornerstone Mortgage Group

Georgia Residential Mortgage Licensee: 21412 • Company NM

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