The Buydown Mortgage
Thinking of buying a home but worried about high mortgage rates? Explore a Buydown Mortgage with your real estate agent and your lender. It’s a strategy to make your home loan more manageable with lower initial interest rates. Perfect for those adjusting to new budgets or expecting income growth.
Understanding Buydown Mortgages
A Buydown Mortgage is a strategic option for lowering your interest rates at the start of your loan term. By paying more upfront, you enjoy reduced rates early on, providing financial ease amidst other homeownership costs. It's a worthwhile consideration for first-time buyers or those upgrading their homes.
The 2-1 Buydown
The 2-1 Buydown offers a similar benefit over a shorter period: a 2% reduction in the first year and 1% in the second. It's tailored for those anticipating an imminent income rise, providing a quicker path to the original mortgage rate.
Temporary Buydowns offer immediate, flexible savings. Unlike fixed-period buydowns, these are adaptable to your short-term financial needs, ideal for those expecting financial stability soon.
This keeps your payment lower for the first two years when you have the most expenses associated with your new house.
Also, most experts predict mortgage rates will come down next year, allowing you to refinance to a lower fixed rate.
Pros
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Attracting Buyers for Sellers
Buyers can see a much larger monthly payment savings than traditional lower sales price negotiations by using seller concessions towards buydown.
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Affording a Larger Mortgage
It enables buyers to qualify for a larger mortgage and a more expensive home than a conventional loan would allow.
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Saving in Early Years
It is helpful for those expecting a rise in income, as it allows savings in the initial years before payments increase.
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Easing into Homeownership
Offering lower initial payments to help them adjust to regular mortgage commitments is especially beneficial for first-time buyers.
Cons
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Reduced Seller Profit
A 2-1 buydown can lower the total earnings from a property sale due to seller concessions.
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Risk of Higher Future Payments
Buyers might only work with higher payments later in the buydown if income increases as expected.
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Limited Availability
Not all mortgage programs or lenders offer 2-1 buydowns, and they are typically limited to specific loan types like new FHA mortgages.
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Upfront Costs
The initial fee for a 2-1 buydown can be significant, and it’s often most beneficial if the seller agrees to cover these costs.
2-1 buydown vs. ARM
A 2-1 Buydown and an Adjustable Rate Mortgage (ARM) are distinct options. A 2-1 Buydown offers a temporary reduction in interest rates for the first two years of the loan—2% lower in the first year and 1% lower in the second, before reverting to the standard rate for the remainder of the term. This is achieved through upfront payments, usually made by the seller. On the other hand, an ARM starts with a fixed interest rate for a set period (often 5, 7, or 10 years) and then adjusts periodically based on market rates. The initial rate of an ARM can be lower than standard fixed-rate mortgages. Still, it risks increasing over time, unlike the temporary, predictable reductions of a 2-1 Buydown.
Questions to ask about the 2-1 buydown
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A Temporary Buydown lowers your loan payments for 1 to 2 years. This reduction is achieved when someone involved in the transaction (like the seller, builder, real estate agent, or lender) deposits funds into a dedicated escrow account to subsidize a part of your mortgage interest.
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Unfortunately, you cannot contribute any amount to this feature. Fortunately, this restriction works in your favor.
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No, it differs. Your loan’s interest rate remains constant for the entire 30-year term, which we refer to as the permanent rate. During the Temporary Buydown, funds from the specially set-up escrow account are partly used to cover your payments.
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The reduction in your payments depends on several factors: the length of the Temporary Buydown, the permanent interest rate, and the loan amount. For instance, with a 2-1 Temporary Buydown, your first year’s payments are calculated at a rate 2% lower than the permanent rate, the second year at 1% lower, and from the third year onward at the permanent rate. The escrow account funds compensate for the difference between your reduced payment and the permanent rate.
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Temporary Buydowns are available for primary residences with Conforming, FHA, VA, and Jumbo loans. However, they do not apply to loans for manufactured homes.
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Not at all! Sometimes, you can make a down payment as low as 3%. Typically, a minimum of 5% is put down on a Conforming loan and 3.5% on an FHA loan.
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If you pay off the loan in the buydown period, the unused funds in your escrow account are applied to your loan principal, effectively reducing your loan balance. There’s no loss involved!
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That’s achievable! While you can’t pay for the Temporary Buydown, you can utilize funds from a transaction party to purchase discount points for a lower permanent rate. If there’s an extra contribution not used for the Temporary Buydown, those funds can also go towards discount points. We can combine both a Permanent Interest Rate Buydown (using discount points) and a Temporary Buydown.
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You must qualify for the mortgage at the permanent rate. Also, there's a straightforward two-page Temporary Buydown agreement to sign, acknowledging the Temporary Buydown amount and how it will be used during the initial years of the loan. The deal is straightforward and free of complicated legal terms.
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That's what we wonder, too! It boils down to what suits your needs and preferences best: a Temporary Buydown, Permanent Buydown, or no buydown with a reduced cash requirement at closing. The decision is entirely yours! Make sure to work directly with both your real estate agent and your lender.
