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Power Buyer Knock believes it’s found a creative way to help take some of the sting out of rising mortgage rates — by letting homebuyers use the equity in their existing home to buy down their mortgage rate or make a bigger down payment on their next home purchase.
The new interest-free home equity advance announced by Knock Tuesday is available to homebuyers using the company’s “Home Swap” product to buy their next home before they sell their existing property.
“With mortgage rates doubling since the start of the year and home prices continuing to grow at double-digits, buying a home has gotten a lot more expensive,” Knock co-founder and CEO Sean Black said in a statement. “At the same time, homeowners have more of their wealth tied up in their home than any other time in history.”
Americans have about $11 trillion in tappable equity tied up in their homes, or about $207,00 on average, according to a recent analysis by real estate data aggregator Black Knight.
Paying an up-front fee to buy down your interest rate can save homebuyers money — but only if they stay in their new home long enough to recoup the costs, the Consumer Financial Protection Bureau advises.
Interest rate buydowns and other fees are usually expressed in “points” — one point is equal to 1 percent of the loan balance. So a homebuyer paying one point to get a lower interest rate would pay $1,000 for every $100,000 that they’re borrowing. How much of a break they get on their interest rate when paying points depends on the specific lender, the kind of loan, and the overall mortgage market.
Knock, which also serves as the mortgage lender for Home Swap customers, claims homebuyers taking full advantage of its interest-free equity advance can save more than $125,000 in interest over the life of the loan when purchasing a median price home.
Here’s how Knock broke down the numbers in a hypothetical example that’s “for educational purposes only,” since rates are always changing.
Knock says a homebuyer using a zero interest equity advance to make a 30 percent down payment on a median-priced home of $416,000 could qualify for a reduced mortgage rate that would save them about $259 a month, or $93,000 over the 30-year life of the loan.
That means they’d be making a down payment of $124,800 — or $41,600 more than the standard 20 percent down payment of $83,200 on a $416,000 house — and taking out a $291,200 mortgage.
Paying one point to lower their mortgage rate by 0.5 percent would save another $90 a month, or $32,400 over 360 monthly payments, Knock estimates.
Mortgage rates and average points on 30-year fixed-rate loans, 2012-2022
With mortgage rates on the rise, borrowers have recently been willing to pay almost double the points they did before the pandemic, according to a weekly lender survey conducted by Freddie Mac since 1971.
In 2019, when mortgage rates were mostly below 4 percent, the average points paid on 30-year fixed-rate loans ranged between 0.4 and 0.7 on a weekly basis, and 0.52 for the year.
So far this year, Freddie Mac data shows average points on the same loans ranging from 0.7 and 0.9 from week-to-week, averaging 0.80 points through July 28.
It’s worth noting that borrowers have traditionally been more likely to pay points when refinancing, according to another recent analysis by Black Knight.
For homebuyers who would like to pay points to get a better interest rate, but don’t have cash to bring to the closing table, Knock’s interest-free home equity advance could be a solution.
Launched in 2015 by founding team members of Trulia.com, Knock has partnered with more than 350 real estate brokerage firms with 120,000 agents to provide home loan financing solutions to homebuyers on home purchases up to $3 million in 75 markets nationwide.
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