Buydown options
A buydown is a type of financing where the buyer or seller pays extra points (also called discount points) to reduce the interest rate on a loan.Buydowns make it easier to qualify for a loan because they lower a loans interest rate. They can also allow you to buy more house for your money.
There are generally two types of buydowns:a permanent buydown and a temporary buydown. A permanent buydown lets you pay extra points to get a low interest rate over the life of your loan.
A permanent buydowncan be paid by the seller or the builder as an incentive to finalize a sale by creating lower monthly payments. Sellers can also benefit from assisting with a buydown with a difficult to sell property or during slower market conditions. It increases the buyer's ability to qualify for a loan, therefore, allowing the home to be sold quicker. Plus, a buydown offer is usually less than a price reduction on the home.
In a temporary buydown, you prepay interest in exchange for a lower rate during the early years of a loan. The most common temporary buydown is called 3-2-1, meaning the mortgage payment in years one, two and three is calculated at rates 3 percent, 2 percent and 1 percent, respectively, below the rate on the loan. On a 2-1 buydown, the payment in years one and two is calculated at rates 2 percent and 1 percent below the loan rate. And on a 1-0 buydown, the payment in year one is calculated at 1 percent below the loan rate.
A temporary buydown can be a benefit to a buyer whose current income is low but anticipates that it will increase during the next two years. First-time home-buyers who need to purchase all of the furnishings that go into a new home may also find a temporary buydown appealing.
From my experience, if you are paying for the permanent buydown, it really depends on how long you plan on staying in the home. If it takes you 4 years to re-coup the cost (the cost of the buydown divided by the difference in what you would have paid with the actual rate and your new rate), and you only plan on staying in the home about 2-3 years then it wouldn't be worth it. Statistics say that most people stay in a home, or loan around 7 years, so just keep that in mind.
If you can get the seller or builder to pay for that cost then great. 1-2% of the cost of the house will go a long way to permanently reduce your interest rate and payment.
Suppose you took out a loan of $200,000 and you received 1% of the loan amount towards a rate buydown from the seller or builder. If the posted interest rate was 6.25% you could get a .25% reduction in rate to 6%. The 1% doesn't go towards the rate, it goes towards the "price" posted on the rate sheets. Call me if you need an explanation on the difference.
This would amount to a monthly payment reduction of $32.33. It would take about 5 years to re-coup the cost difference ($2000 divided by $32.33). So, if you have to pay the buydown with your cash it had better be a property that you plan on staying in for awhile.
A temporary buydown is completely different. The "cost" is usually associated in the price structure of the loan and is what it is. They are fantastic if you truly are in a position of increasing income and can't quite fit into a conforming rate structure today.
Larry Morris can be reached at larry@PDX-Mortgage.com. His website is www.PDX-Mortgage.com.
Larry Morris is a Certified Mortgage Planning Specialist with American Nationwide Mortgage Company in Newberg, Oregon. He specializes in USDA Guaranteed Rural Home Loans, FHA Purchase and Refinance, FHA 203k Rehab loans, Sect 184 Native American loans, Hobby Farm loans and conforming purchase and refinances in the states of Oregon and Washington.
He can be reached at 503-421-0096, or larry@PDX-Mortgage.com.
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APR rates are subject to change based on lender's normal credit guidelines and market conditions.
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