Temporary Buydowns; How They Work (And How To Get One.)
Do mortgage rates have you down? Think buying a house is out of the question right now? A temporary buydown may be the right tool for your situation.
Purchasing a home may seem scary, but the right time to buy a home is always when you’re financially ready. If that time is now, don’t let rates keep you from your dream home.
A 2-1 buydown can be paid for by the homebuyer or the home seller can pay for it as a seller concession. That payment can be made in the form of mortgage points or a lump sum deposited in an escrow account with the lender and used to subsidize the borrower’s reduced monthly payments. This strategy works the best if you foresee rates improving and plan on refinancing your mortgage before your temporary buydown schedule ends.
What is a buydown on a mortgage?
Put simply, a 2-1 buydown is an agreement that provides for a low interest rate for the first year of the loan, a somewhat higher rate for the second year and the full rate for the third year and beyond. The interest rate on a 2-1 buydown would be 2% below the note rate for the first year, 1% below the note rate for the second year and years three through 30 would be at the note rate.
How a buydown can help to reduce rates A buydown helps to lower interest rates by placing the money in an escrow account which then goes every month to the mortgage. This effectively lowers the monthly payment at the beginning of the mortgage.
How to obtain a seller or builder concession for a temporary buydown
When we see home prices drop across the country, that means good news for buyers. Buyers can use their leverage to obtain a seller concession for a temporary rate buydown. Sellers and builders may do their best to incentivize buyers by offering a concession for the temporary buydown without the buyer even having to ask.
Not all temporary buydowns are equal. There are several options when it comes to using temporary buydowns; 3-2-1 buydowns, 2-1 buydowns, and evenly distributed interest rate reductions.
A 3-2-1 buydown allows a borrower to pay less interest on their mortgage for 3 years after obtaining the loan. The points paid on the front end reduce the interest rate by 1% for each of those first 3 years.
A 2-1 buydown provides the borrower with a reduced interest rate as well, but only for the first two years of the mortgage. With this option the interest rate is 2% lower the first year, and then 1% lower the second year.
Evenly distributed Interest Rate Reductions
In some situations, a borrower may decide that they want to reduce the interest rate on the lifetime of the loan. In these circumstances the borrower would pay an even larger sum up front which would prevent the mortgage from gradually increasing back to the original rate.
How Much Does It Cost To Do a Temporary Buydown?
The cost for the temporary buydown is based on the total loan amount.. For instance a mortgage lender might offer a borrower the ability to reduce the interest rate by .25% in exchange for a point. If the mortgage amount is $400,000 with an interest rate of 5% then paying $4,000 would lower the interest rate to 4.75%. The cost also depends on what rate schedule the borrower decides on.
Should I do a temporary buydown?
You should consult your financial advisor or a mortgage loan officer to see if a temporary buydown works for your specific situation. In many cases, a buydown is a great way to not miss out on the opportunity to buy your dream home even when rates are higher.
Are there any limits on a buydown?
If you’re interested, you should go ahead and consult your lender as some restrictions may apply. Buydowns are generally eligible when purchasing or refinancing primary residences and second homes. Buyers still must be able to qualify for the monthly mortgage payment before the discounted rate in order to take advantage of a buydown.
Investment properties and buydowns
Transactions that involve investment properties are generally ineligible, however investors are able to buy down points on a refinance using a conventional loan.
Other questions? Want to know if a temporary buydown is the right tool for you? Get in touch with us and we can help.