The most popular home loan product on the market right now
2/1 buy down loans are the most talked about mortgage product on the market right now because it helps buyers feel more comfortable with the monthly mortgage payments in today's high interest rate environment and don't carry the risks of ARM products that got a lot of home owners into trouble during the last recession. For those who don't have a lot of extra cash, this is a great tool to help you get a temporary lower monthly mortgage without having to spend a dime with the option to refinances if rates go down in the future to secure a low rate long term. In this episode I interview Mina from Guarantee Rate Affinity and we discuss everything you need to know about the 2/1 buy down program.
Josh Alexander
THE brokeredge
JoshAlexanderRealEstate@gmail.com
714.366.2186
DRE#:01974435
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Full transcription below:
Josh Alexander
If you're thinking of buying a home soon, and you want to save 1000s of dollars a year on your mortgage without anything out of your pocket, well then today's episode is going to be for you. So on today's episode, I'm interviewing Mina from Guaranteed Rate affinity. And we're going to be going over everything that you need to know about to one buy down programs. Now, if you're in the process of getting that pre approval to go buy a home, you've probably heard of this before, because it's one of the most, if not the most popular loan option that lenders are using right now, to help reduce monthly mortgage payments when we're in this high interest rate environment. So we're gonna be going over what to one buy down programs are, how the numbers work, when they might be right for you. And more importantly, when it might not be right for you to do this. And that way you can make a decision when you go to purchase your new home. If these two one bite down programs are something that you want to pursue. And as a bonus, at the end of this episode, we're also going to be discussing the new loan limits going into 2023. And how this is going to help buyers get into more expensive homes at a lower interest rate. So let's go ahead and get into it. Okay, everybody, go ahead and welcome Mina back to the show today she's been on it's been a little while. So she's from Guaranteed Rate affinity. So we're going to talk about how to save buyers money. And probably the most popular way to do that. And today's extremely high interest rate environment, especially compared to the beginning of this year is going to be these programs that are called Two to one Bytown. So we're going to be going over them in detail today. And kind of giving you a description of when to use them when not to use them, and how these things are actually used during a transaction. So you can understand the process before you go through and start to try to purchase your next home. So Amina, welcome to the show.
Mina Yasuda
Thank you so much, Josh, for having me in general, but absolutely no question that yeah, the rates have gone up quite rapidly this year. And so this option really came about and it's making a comeback. It used to be more popularized back when the rates were a little bit higher. But essentially, the main purpose of it is to help offset the payment impact that it higher interest rates have. And so to better explain, I'm gonna go ahead and share a screen right at this time to kind of go through an example with everybody. So first thing I'll note, what you do have to have this negotiated from the sellers. And the good news with the current kind of climate we're in for the housing market is, if any of you have been reading the news, you know that, yeah, it was extremely competitive the past couple of years. And still, there are some homes that of course, are a little more competitive than others. But this is for the first time in years. I'm sure Josh would agree that buyers actually have some room for negotiation.
Josh Alexander
Yeah, it's definitely not completely commonplace yet. But it's it's becoming very clear where you're seeing either there with these buy downs, or any type of buy downs or any kind of negotiations, buyers are having a lot more power right now. So this is something that you might not think that buyers especially if you were looking at the beginning of the year, that sellers would be willing to put these type of things into the contract. But this is something that some sellers are having to to, especially those ones that don't have those HDTV ready homes that are going to still fly off the shelves in today's market. Those but those sellers that are really kind of struggling to sell their homes are a lot more open to these type of products. So yeah, go ahead and kind of walk us through it.
Mina Yasuda
Yeah, no, I mean, honestly, I one point, I feel like you have to offer like an arm and a leg along with actual price.
Josh Alexander
On your first point seven Yeah, exactly.
Mina Yasuda
In any case, um, so here's a quick example of actually the example of a client who did utilize this program, we were able to get this negotiated into the contract. But essentially, the loan amount amounted to around $780,000. And overall, the temporary buy down, the benefit is is the first year that first number you see in the name temporary buy down, your rates going to be 2% lower, or the payments are going to be based on a rate 2% lower than the actual rate you're in. So first off, it is still a conventional 30 year fixed loan. It's not any weird loan program. It's still backed by Fannie and Freddie. But first year, your payments are going to be lower by 2%, lower interest rate and the second year is that second number there, your rates going to be 1% lower, or at least a payments based off of it.
Josh Alexander
Okay, no one interrupt you real quick. But I want to bring us to a point because it is something that I hear often with buyers right now, is they're saying, Oh great, this is 2008 all over again, we're doing these arm products are these rates are variable, and we're going to get a lot of buyers into trouble. But I want to emphasize that this is a temporary buy down. This is something that is not variable. When you get into this program, you know exactly what your payments are going to be every single year. It's not that you're hoping and praying that interest rates are going to do something in the future. You're getting approved based on the higher interest rate is correct. Meaning
Mina Yasuda
that they can actually just like on that too. Like that's a really, really important point that you brought up. Yeah, this program is still on 30 year fixed loan and you can't qualify with a rate that's 2% Lower your income the documents you're providing to verify the fact that you can pay back this loan is still based on your actual rate that you're locked into for the 30 year term.
Josh Alexander
Okay, perfect. Okay, yeah, you can continue, it's wanting to make sure that was clear, because a lot of buyers are worried that these are type of products, that's going to get to the issue of all sudden their payments are going to skyrocket to something they didn't expect. And then now they won't be able to afford their house anymore. So this is sure.
Mina Yasuda
Yeah, cuz I mean, in the past, another reminder to everybody that back then there was really no regulation in the mortgage industry. So you can literally come up to me, and you could have just graduated high school and told me, I make a million dollars a year, no verification documentation needed to be provided. So it was the wild wild west. And in my defense, I didn't enter the industry until 2013. And so that wasn't me. But crazy thinking back to those times. So when it comes to this example, again, it's a 30 year fixed loan and the rates locked in at the current market rates. And in this case, they were locked in at 6.5. Now, what the temporary by now allowed them to do, this is only the principal and interest payment, by the way, but 780,000 loan amount at six and a half, that's the payment that it will amount to, but the first 12 months of your loan, because you're only having to make payments off of a rate 2% Lower, your payment is much lower by basically about 1000 or $977 a month lower in payment for the first 12 months. And the second year, it's going to go to a 5.5 And so 1% lower, and that's going to save you about $501 a month for that next 12 months. And then the rest of your loan term is your fixed rate loan that you are approved for and also locked into. And that's what the payments would be. But I do want to emphasize that the reason why this program is making such a big comeback at the moment is because overall, many economists and even Fannie and Freddie agree and are preparing for the rates dropping sometime in the near term. So in the next couple of years, if the rates do drop to let's say, a 5% interest rate, there are no prepayment penalties involved with refinancing to pay off this loan in place of the new one when the rates drop. And so this is simply for the purpose of offsetting that payment increase due to the rate. But during that timeframe, our game plan is to keep an eye on the market and refinance you into that lower rate, once we see the opportunity present itself. So it's a really, really great option to save on the money, at least in the short term, especially when there's enough data to back the fact that the rates be dropped in the short term in the next two years.
Josh Alexander
Gotcha. Yeah. And that's something that we've talked about on this channel often is that, yes, the rates are looking like during pretty much every recession we've had since 1980, at the end of the recession rates have dropped. We've talked about this before, on average, right about 1.8%. So you can kind of see that if we're hovering around the 7% range, right now, that's going to bring us back down into the low fives. When the recession ends. Again, history doesn't always repeat itself. But when it's 100% of the time, every single recession, we've had rates have gone down, it's pretty good indicator that we're most likely going to have rates go down in the near future. Now, again, this is not a guarantee, you can't rely on this information. Because you don't want to get into a product that you can't afford. And that you need to be able to afford, let's say in this specific case, that 6.5% interest rate over the long term, if you can do that, these type of programs are really just for your benefit. And they're kind of like icing on the cake. So you get to purchase a home, you get a lower rate, and there's a good chance over the next two years at some point rates are going to drop back down, you can refinance, and then keep that rate permanently lower. But again, I always want to stress on this channel that you want to make sure that you can afford the higher rate, it's not going to be any kind of financial issue for you and your family to afford that 6.5% interest rate.
Mina Yasuda
Yeah, and that's something I always bring up to clients to when presenting this option. And again, it has to be negotiated. So it may not work for every single office situation. But the main thing too, I think overall, many people are worried about, or I guess in general, the quote I heard recently is wealthy individuals, they just make decisions off of what's the most likely outcome to happen based on facts and data, right. But they're always taking some sort of action. So overall, what I recommend doing is let's focus on you know, ignore the buzzwords that the media throws out because a lot of other media headlines, which I can kind of go into in a little bit too, are just it's so off. It's very interesting that these people keep getting invited back to speak on national television, but overall, it's very likely that the rates are going to drop because of the reasons Josh mentioned and more reasons on top, then we can try to at the very least make a decision on whether or not it makes sense to buy now based on that being a factor along with making sure your head just protecting yourself and you're comfortable with the payments to, but overall right now, because a lot of people have been scared off by the higher interest rates. But we have to remember that, you know, currently the generation entering the housing market or the millennial generation. And back about 30 years ago, if you look at the birth rate statistics, birth rates are skyrocketing during the time that the current Millennials are entering the market. And so 30 years ago, average Asian first time buyers, but because right now, despite the fact that the rates went from 3.3 to a seven, and they're still appreciating the properties in some areas, Orange County, LA County are holding steady, which I'm sure many people would never have imagined that much of an increase to have such little impact. But the reason is because the demand still heavily outweighs supply. Yeah. And so
Josh Alexander
that's I think that's the overall. Yep. And that's something we've talked about, again, on this channel, too. I think one of the last episodes that millennials are going to be driving the housing market for the next couple of years, specifically, at least through 2024. And then most likely, slowly going down past that. But for the foreseeable future, the largest patch of millennials are entering those peak homebuying years right now, getting married starting to have kids looking for places of their own. So that underlying demand is there. And there's always going to be people are looking to purchase homes. So these products are helping get people into homes. Now, before we move on to anything else. The other thing I did want to kind of bring up and clarify with this, because you did mention it is that these programs cannot be paid for by the buyer, they have to be negotiated, and the seller needs to pay for this. So Ken, would you be able to bring up that example, in terms of like how much you would have to actually negotiate with the seller to be able to make this type of a program work for you?
Mina Yasuda
Yeah, definitely. And so like the numbers we were running with this particular client to the home was on the market for quite some time. And they were debating between offering a certain price point lower than the list price, or maybe offering slightly higher closer to the list price. But requesting a credit. So we can find a kind of a win win situation balance for both parties. But with that said, the way it's calculated with how much of a credit you need from the sellers, the main thing is the payment difference, the payment savings, the buyer is benefiting from whatever that amounts due for those two year for the two year period is what the credit we need negotiate with B. So if we go into this chart again, for the first 12 months, if you're saving $977, in comparison to your actual mortgage payment with a six and a half, then for 12 months, that would amount to this number 11,007 35. Now for the second year, again, you're saving $501 a month, and so for those 12 months, that would amount to 6016. And that is the total number that you would have to negotiate into the contract in order for this to actually work. And so how the temporary buy down works with the subsidy, this money is going to be managed by the mortgage company. So essentially, all you have to worry about as a buyer is making these lower payments. But the question I often get oftentimes get is only now let's say after 12 months, so this is used up for those 12 months, right? But what if after 12 months, I ended up refinancing, then there is still this amount sitting in this impound account that the mortgage company is managing for you what happens to that money. And the cool thing is, you don't lose that money either. So if you refinance after 12 months, hypothetically speaking, then that amount left as the subsidy for the temporary by Dale will be used to reduce your principal balance. So it's a principal reduction towards your loans, you're keeping that money in your pocket.
Josh Alexander
Okay, perfect. Yeah. And a lot of buyers are kind of asking, Okay, well, why can't I pay for this? Well, it really doesn't make sense for them to pay for I mean, you're it's $1 for dollar reduction. So if they have the downpayment already, and if they really wanted to do this, they can put the money in the bank, and then just pay a little bit extra $977 a month to have that same exact rate. So there's no reason for buyers to do this program and pay for themselves. This is really meant as a negotiating tool for you, just to like I said, have that icing on the cake, get a lower interest rate, in hopes that rates go back down. Because if you have the money, you have the money to be able to do this stick in the bank account. And that way, if you need it for something else, you can still have access to it, use it if you absolutely need to. But that way, you're just basically taking it out of that account, paying it and making your mortgage, essentially that same type of to one buyer down, but you're doing it yourself. So that's, I mean, I don't think there's any reason I can think of why buyers would want to pay for themselves because there's really no reason to.
Mina Yasuda
Yeah, no, you hit the nail on the head there. Like that's exactly the reason why and overall I mean, when it comes to I guess the buyers kind of concerns right now in this program. It's not really well known yet to many buyers out there, right. And so for many people who may be holding off on buying while rents are continuously going up have to basically wait till the rates drop. Many people are thinking in that way, they're waiting for the rates to drop. And so everyone's going to flood the market at that time the rates drop, and basically put upward pressure on prices. So if that is likely to happen, then this program just helps to get in with a lower rate, essentially, for those first 12 months and the next second year, the 12 or 13, through 24th month, while you wait for the refinance opportunity, but you would have already secured the purchase price of the property and lock that in. And you may have, again, a little bit more negotiating power at this time, rather than when rates drop.
Josh Alexander
Okay. And can you think of any reason why buyers wouldn't want to negotiate this into a contract?
Mina Yasuda
I would say it depends on every family. But the main question I ask first is, what's your payment comfort level? Because overall, kind of like what you mentioned, Josh, I mean, you made a really good point of the fact that ultimately, it's just money sitting there, and you're kind of paying it back in the sense that the sellers are paying for it in this instance, technically speaking, if you're comfortable with the higher payment at your actual 30 year fixed locked in note rate, then it may make more sense, if you can still get a pretty significant credit to just use that to pay your closing costs. So you don't have to come in with that out of pocket. And so this is helpful to offset the payment difference if payments, the primary concern for you. But if the payment at the note rate, it's still comfortable for you, and you'd rather preserve more liquidity, then I think it would make more sense to apply the credits towards just the closing costs. So it depends on everyone's priorities.
Josh Alexander
Okay, yeah. And exactly. And that's, if you think of it as an investor as well, if you have that money set aside, and you can keep it, use it for the mortgage if you want to. But you can also deploy it in other investments to be able to make some return on it, then it might make more sense to go that route, like you said, Me Now if you can afford the monthly payments, it's not a big deal for you, then this might not be the product for you might instead, even if you go put it in I bonds right now, those are returning, it was 9%. Now it's 6%. But that's still a decent return on your money over just a year's period. So I mean, that's something that you could be doing and actually making some money on that money that's sitting in your bank account, instead of just having it sit there applying for a mortgage, if you can afford it. So. Okay, I think that makes perfect sense. So anything else you wanted to talk about those two, one by downs before we move on to the next option?
Mina Yasuda
Yeah, the last thing I'll mentioned is that there are different variations of this program. For example, there's a one Obi down which again, same concept first year 1%, lower the first, second year just goes back to normal. And so that will require much less seller credit, right and easier to shoot in. And so I would just say, if you have any questions, or you want to go over a specific scenario for yourself, then just reach out to me or anybody else that's actually offering this type of option and understands it clearly. Because I think it depends on the property to whether or not this program makes sense and which structure would make the most sense for it.
Josh Alexander
Okay, perfect. Well, thanks for all information on that. So the second thing that I wanted to talk about today, which is going to become more and more prevalent very soon, is going to be the new conforming loan limits. So first off, can you explain to people that aren't familiar with these terms, what a conforming loan limit is and why it's important if these nearly conforming loan limits keep increasing in terms of how it helps buyers out?
Mina Yasuda
Yeah, so it was recently announced, it's going to be going up again. But basically, conventional loans have a limitation on how much they're willing to lend out. So Fannie Mae and Freddie Mac are the government agencies who regulate and set the guidelines for conventional loans. But every single year, they set the limit per county, and so it's different every single county, but for lower cost areas, just as an example, or San Bernardino County, Riverside County, that's considered low cost. But the loan limits this year in 2022, were at 647,200. So that means that you can only get up to that loan amount and still be in a conventional loan. And the reason why the conventional category of loan is very significant is because conventional loans are a lot more lenient. In qualifying standards, comparative to a loan amount higher than the conventional limit, which is a jumbo jumbles will require a higher down payment. And they technically have a 10% down option, too. But the rate difference is quite significant between 20% and 10%. Jumbo, whereas for conventional 2015 10, five, they're all pretty flat across the board in terms of rates in terms of the loan you can get,
Josh Alexander
okay, and then the conventional limit is not the actual limit on the cost of the property. It's the limit on the actual loan amount. So you can still purchase a property over that amount, get a conventional loan, but you have to make sure you're covering the difference from whatever that the actual conventional loan limit is to what you're actually paying for the property.
Mina Yasuda
Exactly. And so that's why you know, for anybody who's strapped with cash, if they wanted to buy a home that's around, let's say, 704 40,000 with a 3% downpayment, that would not have been possible if the loan limits were still at 647,000. Because 3% down and 740,000, that loan amounts higher than the actual amount that Fannie and Freddie are willing to lend up to. So this year, or I'm sorry, I'm for the following year 2023. The low cost areas that are going to be upping the loan limits 715,000. Okay, and in high cost areas, LA County, Orange County, they're going up from 970,800, this year to 1,073,000,
Josh Alexander
which is so to me. Yeah, yeah. I
Mina Yasuda
mean, a few years ago, I still remember when the loan limits for high cost areas was 600. And like, 36,000. Yeah, so now you can technically buy a one point over a $1.1 million property with a 5%. Down conventional loan. Okay. So it just helps to increase kind of more of the flexibility and wiggle room with the cash to close needed to purchase the home. If that was the main concern, of course, for your family.
Josh Alexander
Okay, yeah. So if you can afford the monthly mortgage payment, you make a lot of money, but you're having a hard time saving up money. So for instance, maybe you live in Orange County where rent is 3000 $4,000 a month, at minimum for all these plays, it's hard to save a significant downpayment, even if you're making a lot of money. So these type of products, once they start rolling out, are going to help you get into higher cost properties without having to bring as much down is that basically the kind of the the wrap of it.
Mina Yasuda
Exactly. To put kind of simply, I mean, for the low cost areas, let's say you were looking to put a minimum 3% downpayment, the max purchase price you could have bought this year would have been 667,000, if you wanted to put the bid on 3%, that will allow you to remain at the conventional loan limit this year. But next year, because the loan limits are going up to 715,000, you can now buy a property that's 737,000. So that's about right. That's a quite a significant amount.
Josh Alexander
Yep. Yeah, and especially in that price range, that could definitely make a difference in terms of the type and quality of property combine these areas to so
Mina Yasuda
Exactly. And for the lower lower cost areas. For the conforming limits, they are already in effect for majority of companies out there. Okay, high cost limits, they're going to be going up if you're closing on January 1. So in 2023, you can start going off in the higher loan limits, but if not, currently, it's still denied 7800 of your closing within December.
Josh Alexander
Okay. So if you're trying to get into escrow right now, unless you have an extended escrow period of I mean, we're getting now in November, we're getting closer. But basically, you'd have to have an escrow period or some type of closing 60 days out or so to be comfortable to be able to use these type of higher balance loan products.
Mina Yasuda
Exactly. So Orange County, LA County, we can't go off of the higher cost yet, but at the very least conforming something 15k We can go off from now.
Josh Alexander
Okay, perfect. Well, I think that's kind of all the basic information I need on that. Is there anything else you wanted to mention what those conforming loan limits or anything like that are? Is that? I mean, it sounds pretty straightforward.
Mina Yasuda
Yeah, no, I would say it's definitely pretty straightforward. The main thing I like how you clarify that it's not the purchase price. Yep. Right. Yeah, cuz I know a lot of people get that confused. But I know for many people, it's like when you're buying an investment property, or if you're buying something in the desert, if you're looking at $100,000 property, you can't do a 5% down. And so it's just helpful to have a little bit more purchasing power by thing. That's mainly everything I want to at least comment on, on that topic.
Josh Alexander
Okay, perfect. Well, I think we covered everything pretty well, in terms of the two on buy downs, as well as these conforming loan limits. So hopefully, that gave everybody some good understanding of some ways to save yourself some money if you're trying to purchase a home right now, some exciting things coming in the next couple of months in terms of how do you purchase homes, especially if you want to be putting less money down. So there's a lot of good stuff going on in the loan industry in the mortgage industry now to help out with these purchases and help out with these higher costs and higher interest rates. So, Mina, thank you so much for coming on today. I really appreciate all the clarification and everything. I'm sure we'll have you on again, at some point soon. If anybody wants to get a hold of you, what's the best way for them to do that?
Mina Yasuda
Yeah, if you actually if I post a live educational content on Instagram and seek to connect with me there at me in a mortgage, and then other than that, I'll just include it in my actual profile, you can see my contact info and ways to get a hold of me to schedule a call with me. But the last thing I will mention, I think currently in this environment, it's ultra crucial to just work with a realtor and a lender who understands and knows more options than just inputting numbers like taking an order, per se. Yeah. Or for example, but yeah, I think that's the main thing I would emphasize to anyone who's concerned about entering the market at the moment because there may be more options than you're aware of. And it's just a matter of making sure you're running the numbers asking the questions and gaining full clarity on what options you have and then deciding whether or not it makes sense to move forward. Whether or not,
Josh Alexander
yeah, if you have if you're talking to a lender that's trying to fit you into a box, and this is the only product they offer, it's either you qualify or don't probably the wrong lender to be talking to in this type of market because there is a lot of different options out there. Like Mina was saying, not only the two one, buy down the one oh buy down, there's three to one buy, there's a bunch of other things you can look at. And there's going to have to be I'm going to, it's going to all depend on your specific situation. So definitely, when you are interviewing lenders, make sure you're asking about the different type of options. So you can work together to figure out the best plan financially for you. And then same thing as an agent. Obviously, you want to make sure you have an agent that's familiar with these programs. Maybe they don't know every single detail about them, but they need to know they exist. They need to know good recommendations for lenders to talk to so you can get more clarification on this. So something you should be looking for. If you are thinking of buying a house is make sure you have a good lender, have a good realtor. So you're going to get the best deal on the property and make sure that you're fitting into the right program. That's going to save you as much money as possible. So thank you again, Mina for coming on. today. I will put all of your contact information either in the show notes or the comment section below. That way anybody wants to get a hold of you can and until next time, stay healthy, stay happy, and I'll see everybody on the next show.
Mina Yasuda
Bye bye. Thank you, Josh.
