Temporary Mortgage Rate Buydown Options
Interest rates are a hot topic these days, but don’t fret! There are many home financing options out there that can help you get into a home with peace-of-mind. Certainty’s temporary buydown programs can be a great strategy that can allow you to purchase a home now while keeping your payments lower for the first year or two.
What is a Temporary Buydown?
Homebuyers that are searching for the lowest possible interest rate on their mortgage can take advantage of a program called a temporary buydown. This is a financing option where the interest rate payments are temporarily reduced for the first year (or two) of the home loan, which can allow the homebuyer to ease into their full mortgage payment down the road. Some temporary buydown benefits include:
- Helps buyers counter-act higher interest rates and gain peace-of-mind.
- Available for new construction and existing homes purchases on primary residences.
- Allows buyers to ease into the monthly mortgage payment over time, which can be especially helpful if they expect their income to increase in the near future. Learn more about what goes into a mortgage payment here.
- For Sellers, temporary buydowns can reduce or eliminate price reductions, and can help move a property that has been on the market for an extended period of time.
- If rates drop, the homebuyer can refinance to take advantage of lower rates.
Certainty offers a few different temporary buydown options to consider. Speaking to a local Loan Officer about your financial and lifestyle goals will be a great first step to knowing if these would be a fit for you.
How does a Seller-Paid Temporary Buydown work?
Certainty’s seller-paid temporary buydown programs allow the homebuyer to obtain a fixed-rate mortgage with a lower monthly payment for the first year or two of their loan. Two popular options include the seller-paid 2-1 temporary buydown and the seller-paid 1-0 temporary buydown.
Let’s look at the seller-paid 2-1 temporary buydown option as an example. In this program, the rate is bought down for the first two years of the mortgage loan. If the note rate is 6%, then the rate in year one is reduced to 4%, then 5% for the second year, and then remains at the note rate of 6% for the remaining life of the loan.
The monthly payments you make reflect the current interest rate, so the payments are lower during the first year than they are for the remaining years. During the second year, your monthly payment will increase when your interest rate becomes 5%. In the third year your full monthly payment will be reached, which will remain consistent for the remainder of the loan.
Samples shown for illustration purposes and only features principal and interest. This is not intended to provide mortgage or other financial advice. No Annual Percentage Rate (APR) is shown because the information provided is strictly to show a comparison of the differences in monthly principal and interest payments for each interest rate. Each loan, consumer, financial, employment and credit profile, and loan program will have different costs which will affect the APR. The APR will be higher. These are not advertised rates from Certainty Home Loans.
The seller-paid 1-0 temporary buydown program is very similar except that the rate is only bought down for a one-year period, so your interest rate would be 1% lower the during first year. If your note rate was 6%, then the rate in year one is reduced to 5%. You would then reach your full monthly payment during the second year with an interest rate of 6%.
The money put toward the temporary buydown is put into an escrow account at the time of closing and is paid to the lender to make up the difference.
What is a subsidy?
The subsidy is the sum of the difference between the monthly payments of the note rate and the monthly payments at the bought-down rate. It must be paid in full by the seller and is deducted from the proceeds of the sale of the home. Your Loan Officer will be able to help you calculate exactly what would be required.
Benefits to Sellers
A home seller may consider the seller-paid buydown options if their home has been on the market for a while because it can help attract buyers. Sellers can offer this option as a concession to give buyers more incentive to purchase your home without having to lower the list price of your home.
Temporary Buydowns VS Paying Points to Buy Down Your Rate
Another popular option for obtaining a lower rate is buying down the rate by paying discount points. The rate is reduced by a small amount (say, 0.125% – 0.5%) for the life of the loan and will result in lower monthly payments for the life of the loan. A temporary buydown, by contract, does not last as long but results in the rate and the initial payments being much lower for the first year or two.
Paying discount points to buy down the rate makes the most sense for homebuyers looking to live in their new home for a while because it costs more money up front, and the savings won’t be realized until down the road at the break-even point (the time it takes for the cost of the points to equal your monthly payment savings).
Wrap Up
If rates are a concern for you, talk to your Loan Officer at Certainty about what the best strategy would be for your goals. They can explain the costs of each option with you so you can decide what is the right decision for financing your new home.