Temporary Rate Buydown
What is a temporary rate buydown and how does it work?
Sometimes we are in an unusual market and some tools are better than others for home buyers and sellers alike. A temporary rate buydown is such a tool I encourage buyers to consider in today's market.
Briefly a 2-1 buydown reduces the interest rate by 2 points the first year and 1 point the second year. The third year the rate goes to the note rate.
A homebuyer can save a substantial amount of money on a mortgage the first year and in a market where it seems mortgage rates may go down in the future the homebuyer could have an opportunity to refinance the original mortgage to a permanent lower rate.
How can one pay for a temporary rate buydown?
Given the current environment a home seller can pay for the buydown on behalf of the borrower with the allowable seller concessions. If a borrower refinances before the term is up on the temporary rate buydown the unused funds are refunded to the borrower. In the case of a refinance in a short period, those funds can offset some of the closing costs of a refinance.
Why is now a great time for a temporary rate buydown?
In some markets the higher interest rates have driven homebuyers to sit on the bench and the reduced demand has lowered home prices. A seller would more likely negotiate a seller concession today than a few months ago. A homebuyer would wisely consider the temporary buydown option and purchase a home today vs waiting for lower rates in the future when home prices can be higher.
A seller who perhaps missed selling at the peak of the market could offer an incentive to a homebuyer that would not have made sense a year ago. Markets change, loan programs change; an opportunity to be creative is getting the best deal for all parties should never change. Now is the time to take advantage of a temporary rate buydown.
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