Buying Down Your Interest Rate Temporary vs Permanent with Dave Bryce

buying down your interest rate with dave bryce

Can the strategy of buying your interest rate down benefit you and your home buying journey? What is the difference between a temporary and a permanent buydown?

Dave Bryce of Priority home loans explains what it means, the difference between the 2 and why you might want to take advantage of it. If you are buying a home and would like to get a lower interest rate ask your Realtor or lender about buying their rate down using seller concessions.

If you are an agent that would like to add this to your tool kit contact The Madrona Group or Dave Bryce.



Buying Down Your Interest Rate Temporary vs Permanent with Dave Bryce


I think some of you guys already know
this but I wanted to show you just what closing
costs look like without really even
doing much. You know sometimes i’ll
tell somebody we need $10K in closing costs
and they’ll say why so much closing costs?
I just wanted to show you how this
works because it’s not very hard to hit
ten thousand dollars in closing costs.
so just just the escrow account on this
particular transaction so this one is
the sales price is
5.85 okay
and these people were putting five
percent down
the escrow account on this one was about
forty three hundred dollars none of
these fees right here under these uh
says estimated prepaid items and
reserves for escrow none of those are
anything that we’re charging the client
but they need to come up with 4 300 just
for this account
so what you have is you have a year’s
worth of homeowners insurance you have
um 10 days of prepaid interest through
the end of the month that they’re
closing in so if they were closing on
let’s say
august 21st we would collect about 10
days of prepaid interest through the end
of that month
we’re collecting five months of property
taxes on this one and then there’s also
a two-month homeowner’s insurance
so all of this is getting pre-loaded
into the escrow account at closing
so even if we had zero closing costs and
the title company charged nothing and
the appraiser charged nothing nobody had
any cost for anything you still need
forty three hundred dollars just to pay
property taxes homeowners insurance and
some interest
over here on the left hand side are
closing costs which closing costs are
made up mostly of third party fees
you have
the loan discount fee on that on this
one and that’s to buy the interest rate
you don’t always have a loan discount
fee but on this one looks like there was
one point you can see and one point for
anybody doesn’t know means one percent
of the loan amount they’re paying to get
this interest rate on this one at the
time it was 5.125 they paid one point
and you can see the loan amounts 567 450
and so 56
74.50 is one percent of the loan amount
um then you have a processing fee an
underwriting fee these are our fees and
this is what what we charge on every
loan across the board and that’s you
know to pay the processors underwriters
you know that whole
the whole processing team this is where
that money goes
goes towards um then we have an
appraisal fee
950 that goes to the appraiser that’s
not doesn’t go to us um
then there’s a credit report fee 192
dollars on this one that goes to third
party credit reporting company that we
pull credit with
then you have
um a loan doc prep fee that’s what
that’s a charge from escrow
then you have the title escrow
settlement closing fee on this
particular transaction the escrow
company was charging 14 56 and 18 cents
and that has to do with uh
that that fee will change depending on
what the sales price is
so if this was a million dollar price
point this this might be twenty three
hundred dollars or something um this
actually um is a little bit high from
what we’re used to seeing on this price
point under six hundred thousand
fourteen fifty six but
anyways um this fee is a third party fee
charged by the escrow company and then
there’s a title insurance fee
this is the title company ensuring that
the title of the property that there’s
no liens or infringements
on the home
or on the title of the property and then
we have a recording fee with the county
that’s the county charging a fee to
record this transaction
and then this particular home there was
a homeowners association
there was a fee to transfer from the
previous homeowner to the new homeowner
of 150
and then uh
we have a title owners owner’s title
policy owner’s title policy this is also
the title insurance company
this 1715 if you scroll down you’ll see
right above the yellow
line there’s a seller title insurance
credit of 1715. so the seller it’s it’s
customary in washington state for the
seller to pay the owner’s title policy
it the reason it shows as a buyer’s
closing cost is because it technically
is a buyer’s closing cost but in
washington state
i’m going to say 99.9 of the time the
seller pays this this owner’s title
um sometimes you’ll see on new
construction a builder will not pay for
it that’s kind of the one exception
where i’ll see where
um the seller is not paying for the
owner’s title policy but
nine you know 99 plus times out of 100
the seller will pay the owner’s title
so is that
that’s not anything that um i mean could
we put in there that we would pay it if
it made it that much sweeter
on the buyer’s side you could that would
be something i mean i’d probably look
for other things to not confuse it like
i just you know offer them that much
more money for the house or something
you know sure
because it might get it might confuse
them i would i would think um
so anyways this particular
transaction there’s only one point
origination which that’s that’s honestly
that’s how like when you see rates
quoted uh like with banks like online or
mortgage companies they’re usually at
least quoting with one discount point
which this one has one point
and so just with one point you’re
looking at thirteen thousand one twenty
seven but you can really subtract this
1700 number so you’re talking about
eleven thousand
you know whatever that is uh eleven
thousand four hundred dollars or
something like that is what the actual
closing costs are on this one
but then you also have this escrow
that you have to add in and now so now
you need at least fifteen thousand
dollars on this one of seller credit
to pay for this person’s closing costs
and their escrow account
this is just like a regular permanent
buy down and you could buy the rate down
a lot more and you could really start
spending a lot of money on this loan
discount fee
um but i just wanted to kind of go over
with you guys what it looks like with
like what your buyers see
for closing cost and really most of
these are either third party cost or
they’re the buyer just setting aside
money to pay their taxes and insurance
and some interest
the the fees that are that are our
company’s fees on this particular
transaction are the 5600 the 700 and 695 the rest of this is all third party
or them setting money aside in their
escrow account
and then you know you can see on this
particular one you have a sales price of
5.85 plus the closing cost plus the the
prepaid escrow account means that they
owe 602 425 to buy this house plus pay
the closing costs in the escrow they’re
borrowing 567
that goes towards that 602. they’ve
deposited 10 000 earnest money
and then there’s that seller title
insurance credit of 1715
which means they have a balance left at
closing of 23 260.
and on the far right here is a breakdown
of what their mortgage payment looked
but this is what they see so this is
this is a pretty standard uh
loan estimate or cost analysis worksheet
this is a cost analysis worksheet is
just a simpler uh breakdown of the
numbers um of what you they would see on
a loan estimate.

Buying down your interest rate.

I’m going to show you guys a buy down

this this might look familiar
to somebody in here but i the the names
and and you know all that have been
redacted here but um on this particular
one this is a um
this is a buy down a temporary buy down
sorry where we did a 2-1 buy down
the note rate on this one was
4.375 percent
this is a 10 down payment
so they borrowed 499 500
um the temporary buy down fee to do this
2-1 buy down was 10 000
the 2-1 buy down again means i’m going
to show you something uh the 2-1 buy
down means in year one they’re paying
two percent below the note rate and in
year two they’re paying one percent
below the note rate and then the years
three through thirty they’re paying four
point three seven five
that’s number one
what’s that that’s great yeah no it’s
really cool because in year one they
they saved 552 a month on their monthly
payment if they would have taken and
they paid 10 000 bucks to do this so if
they if they paid 10 000
down on their mortgage that only drops
the payment maybe 60 bucks a month if
they put ten thousand dollars more down
payment down
if they took ten thousand dollars and
they wanted to um
buy down the interest rate permanently
they might save themselves
150 bucks a month or something over the
you know every month for the life of the
loan but somebody that you have that you
know you know they’re projected to make
more money in the future
or maybe
they’re having payment shock and they’re
feeling like geez this is just this this
payment’s too much
this is a nice way that someone can
graduate into their payments
it’s a very conservative loan it’s just
a 30-year fixed mortgage
so they’re not doing anything risky this
isn’t an arm
but it does allow them to slowly ease
into their payments so in year one two
point three seven five year two three
point three seven five years three
through thirty so this says payment
numbers 25 through 360. they’re paying
the 4.375 rate yeah so this isn’t like
some weird arm where the the rate then
balloons out of control
after that first and second year so
that’s just the standard rate and did we
have to buy
did that rate get bought down a point or
was that just like the standard rate at
that time
yeah so
there was a loan discount fee of only
624 dollars so it looks like they paid
an eighth of a point to get the 4.375
interest rate and then they paid 10 000
to buy to do the temporary buy down
so it was almost it was almost zero
points for them to get the 4.375 note
rate which that’s the rate for 30 years
and then they paid that 10 000 up front
to do this thing here where you get the
2.375 then 3.375
um what was the so is this their payment
um it says borrower’s portion of
principal and interest okay
it adjusts to 2500 basically at the end
of it
well yeah so the the the payment is the
payment but
what happens is this 10 000
here that was paid up front gets used to
subsidize these payments so in year one
it’s it’s subsidizing it’s taken 552 but
the borrower’s portion of the payments
only 1941.
there’s no real magic that’s happening
here they’re paying for it up front with
this 10 000. but it’s a night it’s a
nice tool to
you know
sometimes people will want to put more
money down on the house to save money on
the monthly payment that doesn’t really
do a whole lot you know ten thousand
dollars financed over 30 years cost
about 55 a month
if you take that 10 000 and do this
temporary buy down it’s saving them 552
in year one
but then eventually years 3 through 30
they’ll just pay that regular 24.93
the thing is is a lot of people that we
work with are projected to make more
money in a few years than they make
today you know i would think most people
hope to make more money down the road
than they’re making currently you know
and a lot of people are the beauty of
that is um if we can get the seller to
pay it
right yeah
and so you can see on this size of a
loan here
it’s basically a 500 000 loan this 10
000 is not too tough to get from a
seller i think on a property that’s been
listed for a little while
but um
on this particular one if you were
asking the seller to pay for all of your
buyers closing costs and prepaid
expenses you’re talking about so this
this one was 17 000 and then there’s a
seller credit to offset that owner’s
title policy so really this was about
fifteen thousand five hundred dollars
and closing costs plus the escrow
account was about four thousand so you
would need to ask your your um seller
for if we wanted to round up just ask
them for twenty thousand dollars seller
credit and you can really do some cool
stuff like this and you know
help your buyer uh
you know have a nice payment
this payment here on the bottom right
this is not so so really in year one the
borrower the borrower’s payments 3081
minus this 552 so roughly it’s about
twenty five hundred dollars and change
would be your your clients uh
in year one yeah that’s a nice little
monthly payment that’s easy right yeah i
mean you would think i mean
i always use these condos that are
apartments that are on 164th here in
linwood people pay close to that much
money for a two-bedroom apartment on one
side the wildwood yeah the wild woods
they do right it’s like four to five
yeah i know exactly what you’re talking
about yeah there’s there’s some newer
ones that people pay a pretty penny for
for yeah for that monthly we just talked
about that those new uh alderwood uh
ones that what terry what was that uh
his son is looking at some crazy number
like thirty two hundred for three
bedrooms yeah
thirty two 200 yeah
in linwood bro
very easy
yeah that’s that’s a um you know 600 000
plus house
but then there’s also that other like
another one that was like six grand
and then there’s like a few in edmonds
too oh
six grand
anyways um
i wanted to show you kind of what a
temporary buy down looks like um
here’s the thing i i did one of these
type of classes for for this linwood
john scott office too and uh what i was
telling them is if you have a client
that has a pre-approval letter from
another lender
it probably it doesn’t really mean that
much because
the deal is let me show you this other
flyer that we
this is uh don’t worry that this i don’t
know if you can read but this was named
two one buy down but it’s not i don’t
know why it says that
this is a flyer we we were making for
somebody it says the easy way to save
money on your mortgage it says with a
seller credit have the same payment as
an 800 000 house so this this this one
was a 900 000 sales price 20 down and we
showed how
now this is just the principle and
interest but we showed with using a 20
000 credit we can buy the interest rate
from 5.5 down to 4.5
well that that saved
gosh that that doesn’t actually uh
i’d have to take a look here and make
sure that math works um
this is a 700 uh dollar difference in
payment let me just get my calculator
real quick
because lee made this one and i feel
like that payment’s off but the bottom
line is is we we did the math on it in a
or 20 000 seller credit
with 20 down on this house it gave us a
payment when we use that seller credit
similar to that of an 800 000 house so
if your client has a pre-approval letter
that says
they can only qualify for say 8 30
okay with 20
well you could be looking at 900 000
houses they could qualify for a 900 000
house here
you just got to get a seller credit to
help you buy down the rate and all of a
sudden your 830 000 pre-approval letter
person is buying a 900 000 house
and that’s basically because it’s a debt
to income ratio that meets it’s it’s
because of that buy now
what’s that
is that because the debt to income ratio
is under what they would have to afford
with that buy down
on a monthly basis yeah so like let’s
say that they could only qualify for
um let’s say it was a thirty five
hundred dollar payment
and the payment on a
you know
normal nine hundred thousand dollar
house was going to be forty nine hundred
dollars or something or five thousand
if we can use a seller credit we can get
them under that forty five hundred
dollar number and all of a sudden
they’re buying a nine hundred thousand
dollar house where
you know if you just look at it at
surface level
with what they can qualify for they’re
maxed out at like let’s say 8 30 or 8 20
or something like that because they can
only go up to about 4 500 based on their
we can do when you in this market it’s
like we can do crazy things like with
like like these seller credits like we
can do some really fun stuff and help
you know buy houses that they wouldn’t
even think that they’d be able to afford
with these seller credits so
that’s what i was telling the agents in
this office is like your your
pre-approval letters don’t mean very
like because we can go much much higher
um if we have a seller credit than what
your letter says
that’s where it’s like there
these seller credits it can be a real
win-win for both the buyer and the
seller you can attract way more
buyers or more and more buyers can
qualify for your home with a seller
credit than you just lowering your price
20 000 bucks
it’s kind of hard to market that i would
think but
you know
i’m just i’m just saying if you guys
have pre-approval letters
they don’t though the number that’s on
there is not set in stone because we
have seller credits that we can play
essentially like then so our strategy
for us we’re working with a buyer we’re
gonna kick up the price range that our
client asked about
um and we’re gonna kind of like prepare
them in two ways right so they’re gonna
say hey jason that’s higher than what i
said and i’m gonna explain to them okay
well here’s the deal
if we can find something that’s been on
the market uh seven eight you know 10
days 14 days a month
then you know the possibility of us
negotiating you a seller credit
increases and then maybe i can get you
um you know enough money to get a point
buy down in which case your payment will
be the same on on this than uh what it
was you know and if not if you really
want to go for the stuff that’s fresh
coming on the market then just make sure
you’re looking at the price range that
your pre-approval letter says yeah yeah
yeah but yeah i mean we’re you know i’m
agents offering thirty thousand forty
thousand bucks uh to buy down interest
rate or they’re lowering i mean
i mean you guys have probably had some
of these where i’ve seen people lowering
their price by a hundred thousand
dollars it’s like
you could do lower at 50 do do a 50 000
seller credit towards buying the rate
down you know and and
you know there’s there’s there’s some
stuff that you can do where you can
you know do some fun stuff as far as
buying buying down rates and helping
people qualify that wouldn’t normally
would be able to qualify for that
it’s like that’s what i’m saying it’s
like in the market that we had
i don’t know for however many years it
was before
this market that we’re in now
the pendulum was on the side of the
sellers now it’s in this on the side of
the buyers and we can do all kinds of
crazy stuff like
and um
you know
get big seller credits drop your in
rates have already come back down
quite a bit so it’s kind of like man
it’s a nice sweet spot if you’re a buyer
especially if you can get a seller
credit you can you know do one of these
tent buy downs or you can buy down a
rate into the low to mid fours
so and in low to mid fours even even
where we’re at in the low fives right
this this flyer is a little bit old
so that start that five and a half rates
a little higher than what the rates are
[Music]you know you can you can um
you know these rates that were these
rates that were
we have right now if you looked at a
chart over the last 50 years we are we
are at the bottom almost
like the chart would look like this it
went it went down down down down down to
where like during covet we were even
below three percent and then it’s a
little pop right here this is where we
are but if you look at the chart it’s
like this
here’s where we are you know so
the interest rates are still really good
and if you can get a big seller credit
to buy it down further and you’re
getting a price that’s maybe 20 plus
percent less than what they would have
paid in say january
you know
it’s a pretty good uh deal for your
i think it’s today is
i’ve been saying this almost like you
know right now is the best time that
we’ve had this whole year to be a buyer
the prices are down the rates are down
and you’ve heard that
that’s saying that i’m tired of hearing
where people are saying uh marry the
house and date the rate
um but
you know that is that is true though
they say what you know the the people
that i follow um as far as interest
rates go and what their forecast is is
once this inflation gets under control
these these mortgage rates will will
come back a little bit for us
there’s a good chance if you have
somebody that buys a house right now
within the next couple of years
i don’t want to guarantee it and i tell
people this but i’m letting people know
that the forecast is actually for these
rates to come back once once we get this
inflation under control
but there’s a good chance you’ll be able
to refinance so if you really like this
house you’re getting 20 30 off of it
versus what you would have paid you know
four or five months ago
i mean what do you want you know anybody
that’s been waiting
you know
this is a good time
so question you know the answer to this
i’m sure you have a rough guesstimate
anyway let’s say we’re at a roughly you
know eight hundred thousand dollar seven
hundred fifty thousand our house sort of
a you know more of a median price in our
unless i had um
you know fifteen thousand or whatever
over the uh at what year
does it make uh do i actually save more
money by using that money to buy the
rate down permanently
versus temporarily so if i’m a more
play-safe kind of person and i know i’m
going to be in the house five years
seven years uh what’s
what do you think roughly on that
yeah there’s a lot of variables here so
if you’re going to be in the house five
to seven years as long as your break
even on the permanent buy down
you know is within you know less time
than they need you know
less time than when you think you’re
going to be out of the house i don’t
think it’s a bad move to do a permanent
buy down if a break even’s four years
down the road on a permanent buy down
and you think you’re gonna be about
seven years it’s not a bad move if
somebody wants to do that the temporary
buy down
i would say
it’s hard to even compare the temporary
buy down with a permanent buy down
because you’re not really
all you’re doing on the temporary buy
down it’s a tool to help you
um lower your monthly payment
how you know be able to sleep at night
let’s just put it that way um and have a
lower monthly payment and slowly
graduate into your full monthly payment
whereas that permanent buy down you’re
actually spending you know you’re paying
a fee
to buy down
the interest rate
uh permanently it’s it’s it’s hard for
me to compare because they’re two
different things in your situation jason
i i mean
i would say that you can’t go wrong with
a permanent buy down that breaks even
before you’re going to sell
if somebody not the temporary buy down
is not
for everybody not everybody like sees
the value in that um
it just depends how important it is for
you to have that payment relief in the
first couple of years so
sure and i get it and i i you know if
i’m if i’m thinking yeah and some people
are a little riskier and they’re like
okay or you know i just really am
confident that i am going to grow if i’m
a younger person like yeah my income is
going to grow or yes i’m pretty
confident the rates will go down and i
can refinance and sure i’m going to do
that temporary buy down
if i’m sort of like middle of the road
i’m like i don’t know if i really buy
all that um maybe i just like that that
30-year guaranteed lower rate so i just
kind of curious at what point
financially it makes more sense but i
suppose it’s more of a mindset thing
probably anyway i feel like it’s more of
a mindset thing than than what makes the
best financial sense i think that they
both make sense um
and you can’t go wrong doing either one
but um you know the where where you
could go wrong is if you spent a bunch
of money on something that had like a
four or five year break even and
interest rates come back in two years or
a year
and you spent all this money and you
never hit your breakeven point then you
wasted some money so
it’s kind of a tough one um you know i
would lean more towards paying less
points if you can um being that
you know
supposedly and we can’t guarantee this
the rates will come back here in a
couple of years

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About the Author

Jason Fox

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"The best way to find yourself is to lose yourself in the service of others." ~ Gandhi [ Recognized as a top 3.5% agent in the United States. ] [ Jason Fox was born in Everett, WA currently lives in the Meadowdale neighborhood in Lynnwood and has lived in different parts of the Puget Sound area in between. He has been in the real estate industry for 20 years in many different capacities. From General Manager of a real estate CRM engagement business, Founder of 2 real estate marketing agencies, nationally recognized blogger with the Jason Fox Real Estate Marketing Blog, Marketing Manager for a top title and escrow service. ] [ Jason is now an award winning residential real estate sales agent, Co-Founder of The Madrona Group, Co-Owner of John L. Scott Ballard and John L. Scott Westwood. ] [ Active in the community, Jason is a proud part of the Autism Speaks effort to raise awareness for autism. This project is very dear to him as he has an 8 year old son, Hudson, diagnosed ASD. Jason is also involved with Neighbor's in Need, the Forgotten Children's Fund, WELD Seattle and the Union Gospel Mission assisting the homeless population in the greater Seattle area. ] [ "My passion is being able to give back to the community that has given so much to me." ] [ When he is not assisting his friends and family with the services of home ownership he loves being a dad to his 4 children, Carter, Rowen, Tyler and Hudson and being a husband to his amazing wife Sarah. Hiking, working around the house, cheering for the Seahawk's, Mariners and Huskies and golfing. ]

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