Bringing Back Buydowns

A temporary buydown is a loan program that allows a buyer to pay a reduced interest rate (and payment) the first few years of his mortgage. A buydown uses money from the seller (most often), lender (occasionally), or REALTOR (rarely) to pay a portion of the buyer's mortgage payment the first few years. Therefore, it appears to "buy down" the interest rate.

In reality, it doesn't change the interest rate or note rate for the loan. But the payment the first few years is based on a lower rate while being subsidized by the seller or lender. Let's look at an example.

Loan Amount = $700,000

This is an example of a 2-1 buydown. The interest rate is discounted by 2% the first year and 1% the second year. It then returns to the original market rate the third year.

Check out another example.

Loan Amount = $300,000

This is an example of a 1-1-1 buydown. In this example, the interest rate is discounted by 1% each year for the first three years before returning to the original market rate.

Buydowns are gaining in popularity because:

• Interest rates are higher than they’ve been in recent memory and buyers are happy to have the payment relief.
   
• It’s likely that buyers who are paying higher interest rates won’t keep them long! As soon as rates decline, they will refinance.
   
• With more houses on the market and fewer buyers, sellers are eager for methods to set their homes apart from other houses in the neighborhood.
   
• In the current market, a temporary buydown is usually less expensive than permanently buying down the interest rate. And why pay all that dough to permanently buy down an interest rate if the buyer is likely to refinance?

Buydowns can also be funded by the lender in exchange for a slightly higher interest rate. Lender funded buydowns are only available as 1-0 buydowns (interest rate is discounted by 1% the first year before returning to the original market rate). However, lender funded buydowns are only a good idea in a few very specific circumstances.

Buydowns are available on Fannie Mae, FHA, and VA purchases, Fannie Mae refinances, and a few jumbo programs. The program is only available with 30-year fixed rate mortgages. All down payment options are eligible for buydowns.

Buyers must qualify using the note rate (not the discounted rate). So the program can't be used to qualify for a larger loan.

Buydowns are not available on non-owner occupied transactions (investment properties).

If you're interested in learning more about buydowns, contact me for details based on your specific circumstances.
 

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Please note: Interest rates are not indicative of actual interest rates available on any given day and are used only for illustrative purposes.

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