How would you beat those high-interest rates as a first-time homebuyer? David Sidoni has a solution for you! In this episode, David delves into how you can beat the high-interest rate with a mortgage rate buydown. He shows his equation to explain his point why mortgage rate buydown should be your go-to with today’s increasing interest rate. Beat the rates with David! Equip yourselves with David’s insights and tune in to this episode now.
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URGENT”ish” – How First Time Home Buyers Can Beat The High Rates
Using A Mortgage Rate Buydown To Beat The High Interest Rates
According to Bright MLS, 72% of buyers paused their home search in 2023 due to the high mortgage interest rates. They’re getting ready to come back in 2024. This is your urgent-ish alert. I want to make sure I save my urgent alerts for urgent market matters but this is urgent-ish. How would you like to hear some solutions on how to beat these high interest rates? I’m going to tell you.
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It’s Friday night and I was right in this show. My whole family fell asleep. I’m an old dude so I decided to jump into my car and drive to my office, jump into my studio, and record this episode. Of course, I open it with that happy positive thought, “Hey, it sucks to be you.” No, it doesn’t suck to be you. It sucks that you didn’t buy a home back when I told you to when interest rates were 2.66% and that was a “once in a hundred years” thing. I hear all kinds of people bitching right now, “How tough it is to buy a home.”
Guess what? They were bitching back then when interest rates were 2% and 3%. They were saying, ”It’s so tough to buy a home because there are so many multiple offers.” Life moves on and maybe you couldn’t pull it off back then. Let’s not go into this ready to bitch about whatever the negative obstacles are.
Look at it this way. If you could have done this back when rates were at 3%, 4%, or 5%, but you were waiting for something because you thought it was going to turn into this completely easy path. I am sure that in every episode back then, I advised you at that time that if you were close, you should try to make this move as soon as possible, but you didn’t and that’s okay. We’re all here today and that means that we are left with trying to figure out the best options we have.
Let’s talk about that. Let’s talk about solutions. If you started tuning in to this recently and you never even knew the interest rates were at 7%, this solution is going to be for you too. A little thought on timing. We can’t change anything. We were all born when we were born and life happens when it happens. I happened to be a fourteen-year-old kid when Prince was in his heyday, and the very first concert I ever saw was Purple Rain. That’s how my life timeline worked out.
We can’t change anything. Life happens when it happens.
Create The Best Options Today
My wife is on the same timeline. She’s the same age as me. Her first concert was the Dirty Dancing Tour. I want to keep you away from the Dirty Dancing Tour and make you go see Prince at his height. How do we do that with timing and information? Your timing puts you right here today when you’re tuning in to this as a potential buyer.
You do what you have to do to create the best options right now for your rent replacement strategy. Is my urgent-ish tip the greatest secret real estate deal over the last 50 years? No, it’s not. This is a way for you to take advantage of the current market. In the forecast episodes 211 through episode 214, I gave you the numbers and the predictions for 2024 and 2025. It was all there in great detail. It was determined that if you wait for lower rates, you’re going to be in bidding wars that are going to make the Game of Thrones’s Red Wedding look like a peaceful sit-down dinner.
Let’s take this 7% watermelon-size lemon and stop sucking on it and saying how sour it is, bitching about how the Boomers had it better. Let’s squeeze the hell out of this thing and let’s make it better. You can even spike it if you want to for some fun. Let me help you with that. Did I mention that I’m old? There it is, drink.
I saw some dude on social media talking about something that my unicorn realtors and my unicorn lenders have been telling homies for years. If you can, do not ask for a price reduction when you’re buying a home. Do not ask for a lower price when you’re buying a home. I know this sounds crazy. That’s because there’s a better way to save money when you’re buying a home. If you’re using a loan and hate it, mostly out there probably using a loan.
It’s pretty easy once you get your head wrapped around all the numbers of the home-buying formulas. If you’re in a position where you’re asking for a $10,000 price slash, you’re trying to get this home for less than the listing price. When you do that, you’re only knocking $10,000 off the amount of your total loan. That $10,000 is not doing much for you. It feels like, “I slashed $10,000 off the purchase price,” but really you are saving tens of dollars a month over that 30-year loan. If you ask the seller for a $10,000 credit at closing, you can keep that money.
Mortgage Rate Buydown
Think about how much money you’re saving up right now to try to get to your down payment and your closing costs. Imagine if you had an extra $10,000 thrown at you now. That could help with your closing costs. If you already have everything saved up and you don’t need it, great. Take it and use it to fix up the home, or this episode. You can buy down your mortgage interest rate before the rates go down on their own and the market gets B, A, N, A, N, A, S because it will. You’re going to be competing with a fajillion other buyers on one home in a beating war with all those people who want to rip out your eyeballs.
Here’s another example I saw on social media. I did not verify these numbers but I’ve seen numbers like these in the past. It’s pretty average based on my experience. By the way, that’s 18 years of experience not 18 weeks like many of the other realtors and lenders on social media, TikTok, and Instagram begging you to buy a home with them so they don’t have to go back to their real job.
This one that I saw had some numbers on how a potential mortgage interest rate buydown can work. This could be something that you could utilize over the end of winter and early spring of 2024 so you can beat the rush before the rates drop. Here’s what it said, “On a $500,000 home, you could offer $490,000.” If no one else has bid on the home, you’re like, “I’m going to get this for a good deal. I’ll save $10,000.” No, you actually saved about $60 a month. That’s it or you can offer the full $500,000 and you can get a $10,000 credit back to you at the closing, and then you use this for what we call a 2-1 Mortgage Interest Rate Buydown.
A mortgage interest rate buydown is a strategy to reduce the interest rate on the mortgage loan in the initial beginning phases and lower your monthly payments.
In this scenario on this social media thing, the guy said that in order for them to do that based on the rates today, it was going to cost maybe $8000, $9000, or $10,000. You’re going to use most of that credit to pay for the buydown. In the first year, it buys down your rate two full points. It’s called a 2-1 because, in the first year, it buys it down two percentage points. In the second year, it buys it down one percentage point. You go from assumingly a 7% loan to a 5% loan in the first year, and a 6% loan in the second year.
In this particular scenario, that first year when you are buying two percentage points off of today’s mortgage interest rate, you save $578 a month for the first year. In the second year, you get one point off of today’s mortgage interest rate. In this scenario, it said that you’d be saving $296 in your second year. That’s a grand total in savings of $10,752 for the first two years. It seems like pretty simple math to me if there was a way for you to get that money upfront and make your mortgage payments easier for the first two years. Not to mention this scenario, you’re making money with the savings because it’s $10,752. I think buying it down could have been $8,000, $9,000, or $10,000. Here’s the real magic behind this. This also means that you buying a home right now using this means you beat the rush at the end of the year.
Seller Credit
Here’s the other twist on that. It’s going to be very difficult to get a seller credit when the rates come down and there are bazillions of people out there. Remember, 72% of home buyers paused their search in 2023. If they’re all coming out later, it’s going to be tough for you to get a seller to give you credit because people are going to be over-bidding and overpaying. It’s going to be huge. Here’s a phrase that you don’t hear too often, “Hail, you first-time home buyers. Let’s use this stupid freaking high-interest rate to work for you.” Yes, this high-interest rate is a gift. Do you feel me?
How would you like to get out there and punk all of those 72% of those wussy-scared buyers out there? Did that work? Sorry. I tried to get hard there. I’m a Cis Caucasian, fiscally conservative, massively White dude from Orange County, a self-proclaimed nerd. I’m not sure the hard vibe is something that I can pull off.
You know what? Let’s try this. Let me get my want-to-be thug 24-year-old nephew in here to explain. He is currently between career moves right now and has nothing to do on a Friday night so he followed me to the office. As we were driving here, he punched the title of the podcast into chat GPT and Ai and it gave him this. Come on over. Tell everyone, come on.
All right, Uncle Dave. You know, he’s he’s trying his best to help you all out. I’m just out here killing it on TikTok. You know what I’m saying? I started messing around with AI and found some stuff on this buy-down. Maximize your fiscal leverage by utilizing a seller closing cost to offset the payment of a mortgage interest rate buy-down. Damn. That’s crazy. Let me keep spitting my sweet Orange County fire at you.
Don’t forget, player, in the previous scenario, the seller doesn’t give a damn about all that because, to them, it’s the same deal. What? Yeah, peep this, 500k with 10k off as a credit should pop. That’s the same as 490k off the price. That’s a win-win, baby. What? Are you serious, Uncle Dave? Alright, crazy. I feel you. What do you call this, Uncle Dave? We got a little disclaimer here. In order for this to work, you need to run the numbers with your lenders. They will go straight up and change daily.
These do not represent exactly what you can go out and get by the time you, Dave, do you really want to say this? Damn. Alright, so check with your lenders since by the time this is in your ear holes, the numbers will be different. Truth. One more thing. The home has to be appraised for a higher value in order to get the loan amount approved, so check with, seriously, Uncle Dave. I don’t even know what the hell you’re talking about. Why are they checking with a unicorn? That ain’t even real, dawg.
All right that bit has to die now. Write in at HowToBuyAHome.com and put in your two cents. Should I ever do another character on the show ever again? Let me know. I’m taking off the hoodie. It’s me again. You’re nerdy old friend, drink. I’m sure you guys have figured it out already but a mortgage interest rate buydown is paying up front. It’s a strategy used by home buyers that reduces the interest rate on the mortgage loan in the initial beginning phases and it lowers your monthly payments from anywhere from the first 3, 2, or 1 years. This can make the mortgage more affordable in the short term.
If you go online, you’re going to see all kinds of articles about permanent buydowns for the life of the loan, but they are way more expensive. They’re usually only used by people with lots of money, lots of big spreadsheets and they’re doing some very complex break-even formulas. They figure out that if they buy it down half a point right now, the money they save is going to be break-even in about seven years. That’s assuming that they’re buying it at the lowest bottom end of interest rates. We’re not assuming that right now.
We’re not even going to get into the permanent buydowns. We’re going to talk about temporary buydowns. The temporary buydowns reduce the interest rate and consequently, the monthly mortgage payments for that specific period. The most common temporary period buydowns are 1, 0. That means the first year and nothing in the second, a 2,1 and a 3, 2, 1.
The 1, 0 is going to be the cheapest. You’re buying it down one point for the first year. In the second year, it goes back to today’s rate. A 2, 1, you’re buying it down two percentage points the first year. The 3, 2, 1, is the most expensive one. you’re going to be buying it down three points the first year, two points the second year, and one point the third year. In the fourth year, you go to today’s interest rate.
Back in the old days, when I started real estate, the only time I ever heard people talking about this was when lenders would offer this to people who had a guaranteed change in income coming up. For example, a doctor who’s finishing med school or someone who’s about to get their Ph.D. and knows that their next job is going to be a big pay increase.
Let’s use those people, the soon-to-be doc or I guess they’re both docs if you’re getting a doctorate, or for that matter, anyone starting in a career that they know that maybe soon in the next year or two they’re going to get a good job and pay. Here’s how the math works. Imagine you’re coming in with maybe 20% down and you’re coming in today with these high rates. We’ve already talked about the fact that PMI is not the devil and it’s not that costly. If you reduce from 20% down to 10% down, you’d have a nice chunk of cash.
What you could do with that is you could buy a 3, 2, 1 interest rate buydown. Now you would get three full points off of your first year’s payments, 7% interest goes to 4% for the first year, 5% for the second year, and 6% for the third year. Here’s where it gets even more interesting. If the forecast and the predictions are right and the rates drop that magic number of 5.99%, whether it’s late 2024 or the beginning of 2025, then all of those locked-in homeowners or those homeowners who aren’t selling because they’re sitting on their 4% loans are going to think about selling.
Guess who else is around the corner waiting for them to put the home on the market? That 72% of buyers who didn’t tune in to my show, put their search on pause last year, and now they’re going to be busting out like a pack of hungry wolves and pushing prices up with bidding wars when those homes come on the market.
I can’t time when you were ready to do this on your time on Earth but if you take advantage of what I’m talking about using this buydown, when the rates do get to 5.99%, wouldn’t it be nicer to be sitting in a home instead of out there, fighting through the crowds? Now you can refinance your loan. If people are telling you, “You have to buy down,” that means next year or two years from now, you’re going to be at 7%. If rates go to 5.99% and everyone else comes running out, you refinance your loan and you won’t pay one month of that 7% interest rate. You will have gotten your home before the prices go up when the bidding wars get nuts.
I know it’s a lot of math and a lot of complex stuff, so rewind and listen to it. Now you can pay for a buydown by either decreasing your down payment, using some of that extra cash, getting a seller credit, or let’s say you are calculating things at a 5% down payment. I’ve told you that you should do 3%, which is pretty high, but I like to go conservative for your closing costs.
That means you’re saving for a grand total of 8% of the price of a home that you want to buy. Change your savings goal and push it to 10% or 12%. If you’re with the guidance of a unicorn lender whom you’re talking to every couple of weeks, those options are going to change daily with the rates and the market, but if you set that new goal and say, “We’re going to do this with a buydown,” you may end up being able to take advantage. If that’s all confusing to you because you’re new to the show, go back and to season two from the start. Episodes 201 through episode 210 or the 10 basic steps will give you the breakdowns of everything you need and get a little bit more into this.
If it’s a bit too complex, think about it this way. Did you think of beating the one-percenters at their game? They’re rigging this economy. Did you think beating them was going to be simple? Hell no. You got to listen to my dumbass do horrible characters, drop bad dad jokes, and tell you what an old nerd I am, drink, who wants to help you stick it to the man.
Revolution, gang. Right now in 2024, affordability is the biggest issue. Why do you think 72% were sitting on the sidelines? Because of those high interest rates. It changed the affordability. That happened in the fall of 2023, and we now have a good six months of data to see how the housing market reacted to that. I’m telling you, the lack of buyers is still not slowing anything down. When the rates drop, those people who waited are going to be shocked at the crowds fighting to help them buy houses that are going up in price.
Let me drop some numbers on you that I got from my lender. He said the equations are pretty simple for a mortgage interest rate buydown. There are always variables but I’m going to give you his numbers. Bear with me because he’s a lender and he’s not like my nephew. He likes to be exact to the penny. He said that the equation is pretty simple. Take the P and I, the principal and the interest payment, at the actual rate. The example he gave me is 6.99% on a $400,000 home. The principal and interest is $2,658.52.
What we do is we take the P and I for one point less 5.99%. That’s $2,395.63. There are two numbers, 2,658 and 2,395. What you do is subtract the 2,395, that’s the 5.99% payment, from the 6.99% payment, $2,658.52. What that leaves you with is $262.89 less per month. Over the year or twelve months, that’s $3,154.68. Why did I do all that for you? Because he said the equation is simple, but listen to how many numbers I spit out.
That $3,154.68. That’s a rule of thumb at the cost to buy the rate down one point for one year. That was a lot. You take the price of principal and interest as 6.99%, then you take the price of the same thing at 5.99%, subtract them and you get the difference. Multiply that by 12. If you want to pay $262.89 less a month for the first year, you only need $3,154.68 which happens to be exactly the price of the savings for 12 months. What if you got the seller to credit $3,200 and use that for a buydown? If you get into the 2% or 3% points off, that’s going to be a bigger difference when you’re taking three points off 6.99%. That’s why started with the $10,000 credit at the beginning.
I’m going to cut you a break. Number one, I’m not going to bring back Sid Drizzle or whatever I said his name was, and I’m not going to go any further into the details of the math. There’s a ton. If you research this online, you’re going to see a lot of people talking about the break-even formulas. It’s everyone’s favorite buzzword about buydowns. Don’t worry about that. I have been to full seminars where I have paid to see these experts break down everything. A lot of that information that I heard these people say, the first time I heard it, I was like, “This is incredible.”
I then looked and I saw all that stuff posted on the internet. Here’s the thing. Now that I’m older, drink, I’ve realized what’s never at the top of the internet stories and blogs about all these complex mathematical formulas. All of their formulas are based on that math vacuum. What they do is they take constant variables. They use the historical hundred-year data, the averages of a predictable steady market, or what a 10-year market would do over a 5-year period.
That’s all well and good, but those MIT equations and calculations about break-even dates all go out the window if anything unusual happens or changes in the market over the next 3 to 7 years. You will not find someone trying to calculate with that sort of strangeness because that’s where the variables get all over the place. It’s too forecasty and predicty for those math nerds who like things in a nice neat box.
The secret is I am giving you some insider stuff that I usually don’t like to give out. I’m usually making sure that no matter where you are if you’re paying an average rent, I think that eventually buying a home for you is going to be a better solution than continuing to pay that average rent for 3, 4, or 5 years. Actually, I don’t think that. I know that it’s a fact. Today, I’m going to give you that, I hate to say it, but timing advice and investor advice.
I’ve been subtly saying stuff like this is 2019, but this is the time to hack the system. Sucks to be you if you don’t own a home yet. Sure, but it also sucks to be the investor who didn’t buy Netflix stock when it was a freaking fledgling DVD mail-to-your-house service, but we play the hands that Father or Mother Time deals us. We do the best we can in the time now.
This is the time to hack the system. It sucks if you don’t own a home yet.
The big things to remember when you’re figuring out how to buy your first home, there are three of them. The hardest your monthly mortgage payment is ever going to be in those first 3 to 5 years. That’s because it will likely be higher than your rent because of the unaffordability that we’re in right now, but if you go way back to episode 48, you got Ted Lasso believing in your brain, and you accept that a home is for a savings account, which gets easier because you’re already used to an annual rising rent, which doesn’t happen when you get a fixed mortgage.
You also understand that you’re younger and you’re probably going to make more money in your careers as you get older. Because you learn how to budget while you’re saving for a home, it starts out hard but it gets easier. Number two, in today’s economic climate, it’s not as easy to buy at home as a once was, so anything you can do to get your foot in the door is going to benefit you in the long run because the average age of first-time home buyers was 36 dropped.
I’m going to say it’s all due to the podcast, but I only went to 35. For the past eighteen years, every single person that I have counseled said this to me and that’s number three. “Sidoni, I wish I could have done this early.” Sorry, now I did that stupid guy again. My people don’t talk like that. They do say to me, “Sidoni, I could have done this way earlier and stopped renting way earlier. You know what? I’m going to get this home for cheaper.”
That’s what we have going on. If you’re getting any value out of my ridiculous stupid characters, but most importantly, my crazy attempt to help every man rise up and start this revolution, please do me a big favor, and write a review on Apple or Spotify. It does so much to help the podcast get to more people. No views, no followers, no subscriptions. All they look at is reviews. Get on there and share the podcast with a friend. you can do it right now. Text it from your phone.
You can always check out the @HowToBuyAHomePodcast on Instagram and @HowToBuyAHomePodcast on YouTube. Go to HowToBuyAHome.com for any other questions. No thought that you bring with your questions is too small and no ignorance is too vast. We’re all ignorant at some time. That’s why I made a podcast, to educate, empower, and evolve into a badass human who figures out what life is, where life is, and where to take advantage however we can. You can do this.
Important Links
- Episode 211 – Podcast episode
- Episode 214 – Podcast episode
- Episodes 201 – Podcast episode
- Episode 210 – Podcast episode
- Episode 48 – Podcast episode
- @HowToBuyAHomePodcast – Instagram
- @HowToBuyAHomePodcast – YouTube
This podcast was started for YOU, to demystify things for first time home buyers, and help crush the confusion. After helping first timers for over 13 years, I knew there wasn’t t a lot of clear, tangible, useable information out there on the internet, so I started this podcast. Help me spread the word to other people just like you, dying for answers. Tell your friends, family, and perhaps that random neighbor you REALLY want to move out about How to Buy a Home! A really easy way is to hit the share button and text it to your friends. Go for it, help someone out. And if you’re not already a regular listener, subscribe and get constant updates on the market. If you are a regular and learned something, help me help others – give the show a quick review in Apple Podcasts or wherever you get your podcasts, or write a review on Spotify. Let’s change the way the real estate industry treats you first time buyers, one buyer at a time, starting with you – and make sure your favorite people don’t get screwed by going into this HUGE step blind and confused. Viva la Unicorn Revolution!
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