Is a Temporary Loan Buy Down Right For YOU?!?
GUEST ARTICLE BY CLINT BENDER OF FAIRWAY INDEPENDENT MORTGAGE CORPORATION
With interest rates being higher over the past 12 months, what was once old has become new again. Temporary rate buydowns are becoming more of an option now for homebuyers. These options were used during the housing crisis in 2007-2009.
When I originally got into the mortgage business in 2007, we did this option occasionally when the interest rates were in the 6-8% range, and it's now back in style again.
How it works is that the seller (typically) or the buyer can select this option, and it is paid at closing. The seller can only pay the maximum allowed concession (typically called a closing cost allowance) by loan type.
There are 3 types of temporary buydowns:
- 1-0 buydown
- 2-1 buydown
- 3-2-1 buydown
In the 1-0 option, the interest rate is lowered by 1% the first year. The payment differences each month is what the seller or buyer pays and that is put into an escrow account and applied to each monthly payment.
The most popular option is the 2-1 buydown. In that buydown, the interest rate is 2% lower the first year, 1% lower the second year, and the note rate for every payment after that.
Another option is the 3-2-1 buydown, that option is the least common because the seller would be paying quite a bit in concession and there may not be enough to pay for it.
How this works with simple math…………. let’s say a buyer wants to do a 2-1 buydown. Their monthly payment is $2000 per month based on a full market rate at closing. Their payment with the 2-1 buydown is $1700 per month for the first year. Since their payment would be $300 less for the first 12 months, the total buydown in dollars is $3600 ($300 x 12). Let’s say their payment is $1900 for the second year…. that would be an additional $1200 in buydown ($100 x 12). The total buydown would equal $4800.
The seller will have the benefit of having more potential buyers if they offer this up front, and the buyer would have a lower payment for a certain time period while the rates are higher.
Plus, if the buyer would refinance or sell the home during the buydown period, any unused portion of the buydown would be deducted from the mortgage balance with a principal deduction. So, it’s a “win-win” situation for buyers.
This buydown would benefit buyers who just aren’t comfortable with their monthly payment in a certain price range, buyers that may purchase a home before selling their current home and don’t want as big of a monthly payment pinch, and for buyers planning to stay at their new home and expect rates to lower to refinance after or during the buydown period.
To hear even more about buydowns, check out Clint's guest spot on Nikki's This UnBee-Lievable Life podcast. Watch the Youtube version here: https://www.youtube.com/watch?v=DUGvtB1DNII&t=7s