As you read about in our previous example($18,000 Down Payment VS $18,000 Buy Down, which wins?) you see the big impact of lowering your interest rate vs down payment can have. The NACA program is the only true 100% financing program in the country.
In this post, I will show you how to fully take advantage of that to get your interest rate all the way down to the lowest allowed by law, 0.0625%, or 1/16th of 1%.
Lets use the same house figures as before.
Purchase Price: $300,000
Lets use the current starting interest rate through NACA for the 30 year loan: 3.75%.
We already know that each 1% of the loan amount will bring the rate down .25%.
So lets see how many points we need to get all the way to 0%
3.75/.25= 15 points. 15 points = 15% of the loan amount. 15% of the loan amount is: $45,000.
Simply put, you need to come to the table with 45k to lower the rate from 3.75% to 0.0625%. Now these numbers are not entirely 100% accurate, im rounding to make it easier to understand.
Now you have already learned that NACA members may only contribute a max of 7 points to the buy down, and the sellers can contribute a max of 10 points.
Well here is good news. You pay no closing costs through the NACA program. What does this mean? This means that in the case above, if the seller is giving you 3% toward closing, that is $9000 in buy down money you get to use to lower the interest rate.
So lets say you cap out your 7 point buy down: $21,000(This is a fee)
And the seller gives you 3 points: $9000(This is a fee)
That totals 30k. You only need 15k more to achieve the lowest possible interest rate of 0.0625% on your loan. If you simply dont have the funds available, in this scenario, you have lowered the interest rate by 10 points, you will end with an interest rate of 1.25%
Lets say you do have the funds available(and you earn less than 100% of the median income for your area) To find out which Metropolitan Statistical Area you plan to buy in, visit the following website:
What if I make more than 100% of these median incomes? Well, unfortunately you will not be eligible for the lender matching grant. Your final interest rate would be 1.25%(Not too shabby!) You would be able to take advantage of the lowest possible interest rate with the 15 year mortgage though, where each point reduces the interest rate ONE HALF PERCENT.
Lets get back to If you do make less than 100% of the median income. You would then put that 15k into whats called a “principle reduction”, So your loan is now 285k, not 300k,(So you have 15k equity now). The lender now matches that contribution to principle DOLLAR FOR DOLLAR in further reducing the interest rate to the lowest allowed by law 0.0625%.
Now we all like numbers. So lets give some monthly payment/interest numbers side by side
Purchase Price: $300,000
Lets start if you spend no money on the buy down with a 3.75% interest rate.
Monthly payment: $1,749.35
First months P & I payment(Principle & Interest): $451.85, and $937.50
Total interest over 30 years: $200,164.84
Next, lets assume you had 21k to the buydown, and the seller brings 9k, So a 1.25% interest rate
Monthly payment: $1,359.76
First months P & I payment(Principle & Interest): $687.26 and $312.50
Total interest over 30 years: $59,911.82+ Your $21,000 buydown= $80,911.82
Finally, lets assume you fully took advantage of the 0.0625% interest rate
Monthly Payment: $1201.19
First months P & I payment(Principle & Interest): $825.57 and $15.62
Total Interest over 30 years: $2,829.10+ your $21,000 buy down= $23,829.10.
Remember, the 15k you put to principle reduction is back in your pocket in EQUITY.
The last example is absolutely jaw dropping. The first months interest payment is a measly $15.62
See, the thing about the NACA program is, well, it is FLEXIBLE. You don’t need to buy the rate all the way down. Heck, you may not even have the funds to do so. With benefits such as:
-No down payment -No closing costs -No PMI
-Starting interest rate always .25-.5% lower than conventional
You can always use what funds you have available to lower the rate, and if you have none, choose a property where the seller will contribute money. In other words, you have OPTIONS.