What is a Temporary Buydown?
The current mortgage interest rates are not where they were this time last year. These rate increases have impacted new home purchases, especially first-time home buyers. With the current housing trend, we are seeing reduced sales prices and/or seller concessions. Meaning the seller can help pay for things like closing costs, repairs or better yet, temporary buydowns.
What is a temporary buydown? The borrower qualifies at the current standard interest rate. The first year's rate is typically 2% lower than the standard interest rate, the second year's rate is 1% lower and year 3 and forward stays at the standard interest rate. The borrower can always refinance if the interest rate becomes favorable. The cost of the buydown is calculated by totaling the difference in lower monthly payments over the first 2 years compared to the standard rate. For example, the payment difference between 6.5% and 4.5% in the first year and the difference between 6.5% and 5.5% the second year. The total of those house payment differences is what a buyer can negotiate to have the seller pay as a concession, in addition to asking for closing costs. Those buydown funds are deposited as a lump sum into an account. A portion is released each month to reduce the monthly payments.
This is a great option for those who expect an increase in income in the future or have excess seller concessions to use to have a lower fixed rate.
Robert Groves, Senior Mortgage Broker
5635 N.E. Elam Young Parkway, Suite 308
Hillsboro, OR 97124