How to Get a Mortgage Rate Below 5% in 2024: Seller-Paid Buydowns Explained

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Taking the home-buying goal off hold

Welcome to Mortgage Mom Radio. I'm Debbie Marcoux, I am the Mortgage Mom, and every week I bring you the information you need to know about all things real estate and mortgage. My office primarily focuses on the mortgage side — we're doing loans, helping people get into homes, refinance their properties, get their home equity lines of credit, get into a reverse mortgage if that's what you're looking to do in retirement. That's what we do. One of the women on my team is also a real estate agent, and I started my career as a real estate agent, so we have a lot of knowledge in the office to help you with buying, selling, and financing.

Today's show is focused on what you can do to buy right now. We have so many clients who have put their dreams of homeownership on hold because they're concerned about where interest rates are and what that monthly payment looks like. There's just no way they feel they can afford to buy, so they're waiting for rates to come down further.

All of the buzz in the industry is that rates are coming down, and we've already started to see it — truly since about the beginning of December. I don't have a crystal ball and nobody in this industry does, so I can never give you a 100% guarantee that it continues. But it's what we're seeing, and we're anticipating rates continue to come down through 2024, probably slowly. I think once we get to about the third or fourth quarter of this year, that's when things start to come down a little quicker. And from there into 2025, I think we start seeing everyday mortgages back in those normal ranges of about 5%.

Remember that everybody got so used to the threes and the fours, and that's what you expect normal to be. In reality, that was a very short blip in time. It was not anticipated, nobody saw it coming, and it was due to a pandemic. There would have to be something massive to recreate that. So start to readjust your head to what a normal interest rate actually is — a really good interest rate is going to be somewhere between five and 6%.

Buydowns vs. paying points

So how do we help the buyers who have been putting it off get off the fence? We've got options. I've talked about buydowns before, but I've never really given you a real understanding of exactly how it works — what do you need, what do you need the seller to do. So I pulled some scenarios from loans we actually have in the pipeline right now, in process. These are live deals today.

People get very confused between a buydown and paying points. Doesn't it all mean you're just buying down your interest rate? It's a little different. When you pay points, that's you buying the rate down permanently, out of your own money. A temporary buydown reduces your rate for the first year, or the first two years, or on FHA the first three — and as the buyer, you can't pay for it yourself. The seller has to pay for it. So when you write an offer, you need to make sure your real estate agent is helping you write the contract in a way that gets you a credit from the seller to apply toward that buydown.

One thing I do have to say: everyone has a slightly different credit score, down payment, property type, loan size and debt-to-income ratio. Please take these numbers not as a guarantee of what I can absolutely give you, but as a basis for understanding what's possible in today's market.

Scenario one: a conventional purchase at $690,000

This is one we have in the pipeline right now. The clients got their offer accepted over the weekend, we opened escrow on Monday, and we got their rate locked, so this is a true deal in the system today.

Purchase price is $690,000 and they're putting 3% down. They're buying in Los Angeles County, in one of the cities where we have access to a community lending program — one of the good things that came out of 2023, which I talked about on last week's episode. That's not a program for a borrower with low income; this borrower has very good income. It's about buying in an area designated as lower to moderate income, and it gets them a slightly better interest rate.

I want you to hear this: 3% down. The low down payment options are there. Conventional, FHA, VA — all of these get you in the door with a low down payment, and you do not necessarily have to be a first-time buyer to get 3% or 3.5% down. A lot of people think, well, I'm not a first-time buyer, so I need 20% down. That is absolutely not the case.

Their starting base interest rate is 6.625%, which honestly is fabulous. Before rates started coming back down, that rate would have been a minimum of 7.625%, if not very close to 8%. So we've already seen a big decline.

But they wanted a lower payment, and to get there we needed a lower rate. So — the buydown. If they're at 6.625%, a one-year buydown puts them at 5.625% for the first year. Why is that great? Because rates are moving the right direction. It gives them a year at that lower payment, and a year from now, when we're anticipating rates in the fives, they can refinance into that rate on a full 30-year fixed. Worst case, if rates haven't fallen or they've gone up, they're still on a 30-year fixed and the rate simply goes to 6.625% after the first year and stays there. It is a 30-year fixed loan.

The one-year buydown in this scenario would have cost $4,899. Under five grand. It is very easy and very common to negotiate a seller paying $5,000 in costs — that's by no means out of the picture. There's no prepayment penalty, they can refinance at any time.

But their agent was actually able to negotiate about a $19,000 credit from the seller. That let them buy the rate down for two years instead of one. So year one their rate is 4.625%, year two is 5.625%, and then year three and the remaining 27 years are at 6.625%. They didn't feel like they needed that 4.625% — where they really want to be is around the mid fives — but this gives the market two years to get there before they have to refinance. They didn't know if rates would arrive within 12 months, and they wanted the longer runway at the lower payment.

The two-year buydown cost about $14,500. They used the seller's credit for it, so it didn't come out of their pocket, and when they eventually refinance they won't feel like they threw their own money away. They also had about $4,000 of that credit left to apply to their standard closing costs. Even when your down payment is 3%, your closing costs are around 2%, so that helps bridge the gap and gets them in the door with less cash.

What it does to the payment

Let's talk monthly payments, and I'm giving you the whole payment — principal, interest, taxes, insurance and mortgage insurance, not just principal and interest. If you have less than 20% down, you have mortgage insurance too, and I want you to hear real numbers.

At 6.625% right out of the gate, that payment is $4,986 a month. For the first year at 4.625%, they pay $4,191 — a $795 saving every month, almost $800 for the first 12 months. The second year the payment goes to $4,579, still about a $400 monthly saving. Then in year three they arrive at $4,986.

The whole goal is that the elevator is moving down. Before they hit that final fixed rate in year three, they have the opportunity to refinance and lower the payment for good.

That is how you get a buyer into a home today at an affordable payment, with an interest rate you were hoping for, in sub-6% territory. And remember, even 6.625% is phenomenal compared to two or three months ago. We've seen major improvements.

It also gets you out looking now, while you can still negotiate — keep your appraisal contingency intact, do your home inspection, ask for repairs. Those are normal in a standard market, which is what you have the opportunity to work in today. When rates come down even a little further, that's probably not going to be the case. So many people have been waiting that it's going to be nuts, like 2020 and 2021, and much harder to get an offer accepted.

Scenario two: FHA and the three-year buydown

On FHA you're allowed a much bigger credit from the seller toward closing costs than you can get on a conventional loan or even a VA loan. Because of that, an FHA buyer has the opportunity to do a three-year buydown.

I ran this one today off a $650,000 sales price with 3.5% down on an FHA loan, and the starting base rate was 6.25%. With the maximum credit you could get from a seller, that 6.25% could start the very first year at 3.25%. Second year 4.25%, third year 5.25%, and then it settles at 6.25% in year four. I had to rethink that one for a second myself — it's such a low rate I didn't believe it.

How much buydown you need really comes down to you. Where is the comfortable monthly payment? Do you think you'll have the chance to refinance into a comfortable permanent rate within 12 months, or do you feel like you need longer for the numbers to play out? I don't necessarily think the three-year buydown is absolutely necessary — but if you can get the seller to pay for it, why not?

Here's the payment picture on that FHA scenario. The full payment including principal, interest, taxes, insurance and mortgage insurance in that first year at 3.25% is approximately $3,795, a saving of $1,132 per month. Second year, $4,151, a saving of $776 a month. Third year, $4,529, a saving of $398. And then in year four, worst case scenario where rates never got better, you're at 6.25% and the payment is $4,928 for the remaining term.

It is still a 30-year fixed rate. It is not an adjustable. There are no balloon payments. You simply end up at today's market rate eventually. It's a really good way to get into a payment that's comfortable for you, and it gives the market time to settle so you can refinance and lock in a lower payment for the long term.

Scenario three: VA with zero down

Now to all my vets. Just like FHA and conventional, you have the opportunity to get the seller to buy your rate down. On VA we can do a two-year buydown — not a three-year like FHA.

I pulled this today as well: $650,000 sales price, zero down, and the rate today was 6.25%. VA requires no money down and there's no monthly mortgage insurance. Year one at 4.25% makes that payment about $3,900, a saving of $800 a month. Year two, $4,366, a $412 saving. And years three through 30, $4,779.

This is also a great chance to point out a difference. I have a lot of people call me and say, I have VA eligibility, but a lender told me it was better to go conventional. In all the years I've been doing this, I have never understood why anyone would tell someone not to use their VA benefit. Same $650,000 price: zero down on VA versus 3.5% down on FHA, and the monthly payment difference is about $200 a month, because there's no monthly mortgage insurance on the VA loan.

VA loans do have to be written correctly — they're a little trickier. We do them every day and they're by far my favorite loan program to write. Many credit unions and banks don't offer government financing like FHA or VA at all, so it may simply be that the person you're talking to doesn't have the product. If you've earned that benefit, always ask to see the difference between conventional, FHA and VA so you can decide which is right for you.

Wrap-up

We've got a couple of loans in the pipeline right now doing exactly this. It's helping buyers get into homes they didn't think they could. They were on hold, on hold, on hold. We talked to their realtor and said, I know it's hard to ask a seller to pay costs, but if you can get this negotiated, we can get them into something comfortable and they can buy today. It worked. They went out, they looked at homes, they negotiated it, they're in escrow now, and 30 days from now they'll be homeowners.

I also want to mention my tools app, because I haven't talked about it in a long time. It has the calculators — you can run a payment for FHA, VA or conventional, for a purchase or a refinance, and you can plug in 4.25%, 5.25%, 6.25% yourself and see the difference. If you're considering a 3-2-1, 2-1 or one-year buydown, it lets you find your own sweet spot. Text the words “phone app” to the same number and you'll get a link to save to your home screen. There are payment calculators on mortgagemomradio.com as well, though the app is where you can choose the loan type.

If you want to get interactive, text the word MOM to 844-935-3634 — that's 844-WE-LEND-4 — and you'll get one text a week when I go live. It's the same number to call my office and talk with me or one of my girls. You can also book a phone appointment on the calendar at mortgagemomradio.com, including weekends, and if no time works you can email me straight from the site. I hope you all have a fabulous rest of your week.