06/07/2023
All you need to know about Temporary Rate Buydown!!
So, what does it mean to use a "Temporary Rate Buydown" when buying a home? Is it worth it? Is my rate still fixed? What does it cost? Read on!
In the world of real estate, there are a variety of tools and techniques that can be used to help buyers secure a mortgage and make their dream of homeownership a reality. One of these tools is known as a temporary rate buydown, and it can be an incredibly effective way to lower mortgage payments and make buying a home more affordable in the short-term.
So what exactly is a temporary buydown? At its core, this strategy involves paying an upfront fee to a lender in exchange for a lower interest rate on your mortgage for a set period of time. Essentially, you are pre-paying interest on your loan in order to reduce your monthly payments during the first few years of homeownership. This is NOT an adjustable rate mortgage (ARM) as the rate is actually fixed for the term of the loan but is temporarily reduced for 1, 2 or even 3 years!
There are a few different ways that a temporary buydown can be structured, but one common approach is known as a 2-1 buydown. Under this type of buydown, the interest rate on your mortgage is reduced by 2 percentage points during the first year of the loan, and by 1 percentage point during the second year. After that, the interest rate returns to its original level and your payments will be fixed for the remainder of the term, unless you specifically chose an ARM.
So why would someone choose to do a temporary buydown? There are a few key benefits to consider:
- Lower monthly payments: By reducing your interest rate during the first few years of your mortgage, you can significantly lower your monthly payments and make homeownership more affordable. This can be especially helpful for buyers who are stretching their budgets but know that their income/expenses situation will be better in a year or two.
- Ability to ease into homeownership costs: Because your payments are lower, it can be easier to budget and plan for other expenses. This can be particularly beneficial for first-time homebuyers who are adjusting to the costs of homeownership.
- Increased buying power: I always say "Being able to buy something doesn't mean you should buy it." Nothing buys a good night of sleep. But, instead of saying no to a property you fell in love with because it's a few hundred bucks per month too expensive for you at this moment, a temporary buydown may be the solution. This option is really good for fairly new business owners, with 2 years of self employment history and a positive forecast for the next few years or for wage earners that consistently get bonuses and raises yearly. As their income grows over the next few years, their mortgage obligation can also grow through that period so they can more comfortably say "Yes" to a better, more expensive home and grow into the full mortgage payment over time.
Who pays for it? Typically the seller pays for it through seller concessions. We can also get the lender to pay for it through what is called LLPA (Loan Level Price Adjustments). Talk to your Real Estate Agent and call me at 774-279-1900 so that we can structure the offer contract perfectly.
Is my rate fixed? Well, it depends of you chose a fixed rate or adjustable rate mortgage product, as you can use a temporary rate buydown with either product.
Example? Say you apply for a fixed rate mortgage and your rate is 6.375% fixed for 30 years and you choose a 2-1 buydown. In this case, your mortgage will be calculated based on the rate of 4.375% for the first year, 5.375% for the second year and then the full rate of 6.375% for the third year until the end.
Overall, a temporary buydown can be a powerful tool for buyers who need some extra help making homeownership more affordable in the front end. With the right approach, a buydown could be just what you need to make your dream of owning a home a reality. Call me at 774-279-1900 to know more!
