When you’re in the market for a new home or looking to refinance your existing mortgage, you’ll likely come across various financing options and terms that may seem confusing at first. The Payment Advantage Plan is an innovative way to make homeownership dreams more affordable considering high rates, thanks to the collaboration between the builder/seller and preferred lender. Let’s dive into what it is and how it can benefit you.
How does it work?
The builder/seller and preferred lender set aside a lump sum of money in an escrow account that covers a portion of the buyer’s interest payment for a short period. This allows the homeowner to have lower monthly payments during the first few years of their mortgage.
Here’s how it works:
Year 1: The 2% Discount
In the first year of your mortgage under the Payment Advantage Plan, you’ll enjoy a 2% reduction in your interest rate compared to the standard rate for your loan. This significant discount results in lower monthly mortgage payments during this initial period. If Interest rates are 7%, your first-year interest is 5%. Take a $700,000 home, where homeowners are putting 20% down. Monthly payment with taxes and insurance in Rutherford County is estimated to be $4,392, with a 7% rate. On the Payment Advantage Plan, the first-year monthly payment would be $3,672. That is $720 a month savings, for a total of $8,640 for the first year.
Year 2: The 1% Discount
Moving into the second year, your interest rate will decrease by an additional 1%. While it’s not as substantial as the first-year discount, it still significantly lowers your monthly payment compared to a traditional fixed-rate mortgage. In the above scenario, the rate would move to 6% the second year. The monthly payment would be $4,024. A monthly savings of $368 or $4,416 for the year.
This is a combined savings of $13,000 over a 2-year period. In addition, for the $700,000 home, assuming a 1% increase each year, there is more than $20K in equity over 2 years.
Advantages of the Payment Advantage Plan
- Lower Initial Payments: The Payment Advantage Plan provides immediate relief by offering reduced monthly mortgage payments during the critical early years of homeownership. This can be particularly beneficial if you’re on a tight budget or if you expect your income to increase in the future.
- Predictable Budgeting: With gradually increased payments, you can better predict your housing expenses, making it easier to manage your finances and plan for other financial goals.
- Flexible Financial Planning: This approach allows you to allocate freed-up funds towards other financial priorities, such as saving for emergencies, investing, or paying off other debts.
Michael’s Homes has several homes available for the Advantage Payment Plan. To learn more, contact us, [email protected]
