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By: Charles Woodall
Managing Broker

http://www.dothanhomesearch.com

Several homebuilders around Dothan have started offering some special financing options for purchasers of their homes. Programs called 2/1 buydowns are becoming more and more common as builders try to clear finished homes from their inventory. This post will cover this financing option in more detail.

When a home buyer is using FHA financing, rules state that the seller is allowed to contribute up to 6% of the sale price toward costs associated with the sale, including closing costs, prepaid items, etc. These special financing options take advantage of this rule and use this money to buy down the purchaser’s interest rate for the first two years of their loan. Here is an example of how this might work on one of my new construction listings, 107 Brittany Drive in Dothan.

• At a sale price of $175,900, the seller could contribute up to $10,554 (6%) toward buyer costs.
• The interest rate on the loan would be 6.25%, which means a principal and interest payment of $1066.32, starting in year 3
• The rate in year 1 would be 4.25% with a P&I of $851.96
• The rate in year 2 would be 5.25% with a P&I of $956.32
• The difference in payments between the actual P&I ($1066.32) and the P&I during the first two years would be $4002.32, which is paid by the seller at closing as part of the 6% contribution.

That still leaves $6551.68 available, which would more than cover closing costs and probably most of the prepaid items. Translated, the buyer gets a new home with only the 3% FHA down payment out of pocket plus reduced payments for the first two years. The builder gets the home sold while protecting the sale price and property values. Yes, this program could cost the seller more money compared to more traditional financing. Each seller will have to look at their bottom line to see if this is an alternative they can offer. These programs can also be offered on resale homes!

This program can also be used on conventional financing, although the amount the seller can contribute is sometimes lower. On a conventional loan at a 95% loan-to-value ratio (5% down payment), the seller can only contribute up to 3% toward buyer costs. At 90% LTV, the contribution can be as much as 6%. In addition, there are conventional mortgage products that allow the seller to make the first three payments for the buyer, which gives the immediate benefit to the buyer rather than stretching the goodness over the first two years with a reduced payment each month.

In addition to 107 Brittany Drive, 100 Crooked Creek and 101 Crooked Creek are also eligible for this type of financing. If you are interested in learning more about either of these programs, or want to explore some other financing options, contact us.

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Posted by Charles Woodall | Currently 2 Comments »

By: Charles Woodall
Managing Broker

http://www.dothanhomesearch.com

We as real estate professionals are asked all the time about the relationship between what is called the?Federal Funds?Rate (fed rate for short), and mortgage rates. The most common?question is “I heard on the news that the government lowered the fed rate, so will mortgage rates come down?” To answer that question, we first need to look at how and by whom each of these rates is determined.

The?Federal Runds?Rate is the interest rate the Federal Reserve Banks charge depository institutions on overnight loans.?The fed rate?is an administered rate, set by the Federal Reserve Banks, rather than a market rate of interest. The fed rate acts as the gas pedal for?our economy. Lowering?this rate?is like hitting the gas, giving the economy a boost by putting more money in. Raising the fed rate is akin to pressing the brakes on the economy; doing so tightens the supply of money making it harder to borrow.

Mortgage rates?are a market-determined interest rate for long-term residential mortgage loans. Mortgage rates are competive rates, set individually by mortgage lenders, and are based on the demand for mortgage-backed securities.?Because there are so many factors that can effect mortgage rates, such as unemployment, the stock market, inflation, etc., the public perception of the economy can be the leading cause of a change in rates. As a general rule, watch the various economic data. If the data shows hesitancy and confusion, mortgage rates may fall. Conversely, if the data shows strength and low unemployment, rates may rise.

Since?they?are governed by market forces and not controlled by the government like the fed rate, is there anything we can?watch to guage where mortgage rates will go? Yes, in fact there is. Watching the movement of the 10-year Treasury bond is a great way to get an idea of where mortgage rates are heading. Historically, mortgage rates have followed the movement of these treasury bonds.

What’s the bottom line? A change in a short-term interest rate such as the fed rate may not affect rates on long-term interest rates such as mortgages directly. However, along with many other economic factors, the fed rate does play some small role in determining what interest rate you will get when you buy your new home in Dothan.

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Posted by Charles Woodall | Currently 1 Comment »