Interest-Only vs Fully Amortized
What is better – a fully amortized loan at 8% or an interest-only loan at 9%?
$500,000, fully amortized, at 8% gives you a payment of $3,669 per month.
$500,000, interest-only, at 9% gives you a payment of $3,750 per month.
40 Years vs 30 Years
What is better – an 8% loan amortized over 30 years, or a 9% loan amortized over 40 years?
$500,000 amortized over 30 years at 8% gives you a payment of $3,669 per month.
$500,000 amortized over 40 years at 9% gives you a payment of $3,857 per month.
As you can see in both of the above examples, the fully amortized payments over 30 years (at a lower rate) are clearly lower.
Buyers are desperately looking for payment relief options right now in today’s high-rate environment.
But many of the options available come with higher interest rates that not only offset the relief, but they also come with payments that are actually higher!
The reason for this is because 30-year fully amortized loans are deemed less risky, are more heavily traded/demanded (fostering market efficiencies that keep rates lower), and/or are subsidized by Fannie Mae/Freddie Mac/FHA, etc.
There are “graduated payment” loans on the market too where payments are held artificially low in the first years of the loan, increasing by 5% each year for the first five years of the loan. But these loans also come with higher rates.
So, the above payment relief loans are often not a good option for strong borrowers who qualify for competitive conforming, FHA, or jumbo financing.
BUT – they can be very effective for “non-QM borrowers” – who fall outside the conforming, FHA, and jumbo boxes and thus do not qualify for the best 30-year rates in any case.
In other words: non-QM borrowers should definitely consider payment relief options!
In any case, most buyers should beware if they are offered “payment relief” because it may not actually be relief at all.
The Best Payment Relief Option: Temporary Buydowns!
We love temporary buydowns at JVM for many reasons that I discuss often: (1) They provide immediate payment relief without sacrificing on rate; (2) we think it is very likely that borrowers will be able to refinance into a lower rate before the buydown period ends; (3) the remaining funds held in escrow for the cost of the buydown are refunded when borrowers refi; and (4) they are wonderful marketing tools for listing agents as well (and we are happy to help market them too).
How About a 1/0 Buydown?
I often push 3-2-1 Buydowns where rates are decreased by 3% in year one of the mortgage, 2% in year two, and 1% in year three – but those buydowns require large seller credits to pay for them.** So today, I am going to push a 1/0 buydown, which brings the rate down a full 1% for the first year of the mortgage. A 1/0 buydown for a $500,000 loan only costs about $4,000 – a cost that is much more palatable for sellers.
**Only sellers and third parties can pay for temporary buydowns; buyers are not allowed to pay for them.
FINAL NOTE: The index of Leading Economic Indicators came in worse than expected/negative for September – which is the 18th month in a row. How anyone thinks we will avoid a recession is beyond me.
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