Ever talked to your loan officer about ‘why’ you are in the market to buy a house?
Think about what motivates you to buy a house. Is it to move into a bigger house and have more room for your growing family? Is it to downsize because your children have moved out and you are on your own?
At First Mortgage Direct, our friendly and experienced loan officers have one goal: making your home ownership dreams a reality. Whatever your “why” is, we have a loan for you!
Keep reading to learn more about one of those loan options: the Buydown.
The “new” old product, the Buydown
The “new” old product that you are probably hearing tons about right now is the Buydown mortgage product. The Buydown does have some advantages in the current rate market that we are living in.
The Fed hiked the rates again recently, creating benefits that perhaps were overlooked when interest rates hovered around 2-3%. This option allows people that are looking to downsize, change jobs, get in a different school district to stick with a payment that works for their scenario.
If the payment at a made up 5% is manageable but at 8% it isn’t, let’s talk about a Buydown.
Ok, I need a Buydown, now what is it?
When discussing your financial information with an FMD loan expert and we decide a Buydown is right for your unique situation and new home loan, let’s discuss the mechanics. Simply put, a Buydown is an annual reduction in your payment through a lower interest rate.
The term “Buydown” is actually an umbrella term that encompasses many different options.
A 2-1 Buydown lowers your interest rate by two Percentage points in the first year of your payment. For example, your going market rate (note rate) is 7% (cough) BUT with a 2–1 Buydown, we can have your year 1 payment calculated at 5% which is significantly less than if it was at that 7% note rate.
This allows you to get the house you are wanting for a more manageable payment. Ok, what does year 2 hold? Year 2 then would be one percentage point less than your note rate. For this example, your first-year payment would be calculated off 5% and then your second year would be calculated at 6% and then the third-year payment is at that note rate of 7%. Remember, the numbers are just an example but the concept of 2% less year one and 1% less in year two is exactly how it would be calculated in your Buydown loan.
A 3-2-1 Buydown reduces the note rate by 3% in the first year, followed by 2% in the second year, 1% in year three and the note rate for the remaining term. Non-reduced rate applies for years 4-30. Remember this is a FIXED rate loan.
A 1-0 Buydown reduces the note rate by 1% in the first year. Then years 2-30 are the note rate, or non-reduced rate. The borrower must qualify at the non-reduced rate or the note rate.
Ok, that was a lot of numbers thrown around. We understand if your head is spinning, so here’s some answers to our most common questions about Buydowns to clear things up.
Who pays the Buydown?
Superb question! Different programs and investors have different rules, and your trusty mortgage loan originator will know the ins and outs of this question. In general, an interested party to the transaction can contribute to the Buydown on your behalf.
This could be your builder, seller, or another person close to the transaction (like a realtor). Why not have your builder put money toward your closing costs? Right now, with the market the way it is, sellers are starting to pay closing costs. Later we will mention how much the seller can put toward the closing costs in your purchase!
Who holds the money?
Another great question! The servicer is the one that holds the money for your Buydown in an account and when you pay your loan off; the remaining money gets subtracted from your remaining principal mortgage balance.
This, simply put, reduces your mortgage balance when you go to refinance or sell your home. The servicer releases a portion of the funds in this Buydown (sometimes referred to as an escrow account) each month, which allows for the reduction in the interest rate and monthly payment.
What happens to the Buydown account when you refinance? Pay the loan off? The remaining amount of money in the Buydown account is your money! It is subtracted from the amount you owe as a principal reduction.
Yes! It lowers the amount of money you owe on the home 🎉
If you have been paying on your home for eleven months and pay it off, then you get the balance of the account taken off your principal balance. If it is a 2-1 Buydown, then you get 12 months of your account reduced from your payoff when you refinance or sell your home.
Who benefits from a Buydown?
Honestly, in today’s market, all the parties in the transaction benefit from a Buydown.
The seller can avoid reducing their sales price by offering to pay seller concessions*. The seller also makes the financing look more attractive in a higher rate market!
The buyer has a lower initial interest rate that can align with their “why”. It can also be ideal for borrowers that have a potential hike in their earnings over the next couple of years. Purchasers can also put money saved each month toward other needed items like repairs, monthly family expenses, and savings!
*The seller concession rules are different for each loan type and can vary between down payment amounts. An FHA loan is 6% of the sales price. Conventional is 3% if you do anything less than 10%. Common conventional down payments are 3% down and 5% down so those are 3% in seller concessions. If you put 10% plus down, it is 6% seller concessions on a conventional loan. VA is 4% but can go higher if it is common for their local market and USDA is 6% seller concessions. By the way, what does “seller concession” really mean? These are closing costs that the seller agrees to pay. Typically negotiated when you settle on the cost of the home.
Why would a Buydown be better than paying discount points?
A discount point would be a reduction in the interest rate for the life of the loan. If you do a 30-year loan, that rate would be reduced for that entire 30-year period. The cost of the discounted rate would need to be assessed as well.
How much does it really cost for you to buy the rate down permanently compared to the savings each month of a ‘Temporary’ Buydown? Plus, the rates will go down at some point, and you will want to refinance! Depending on the timing of the refinance, you probably won’t have recouped the cost of the discount point(s).
Yes, the Buydown is temporary and at the beginning of your loan with instant savings that the seller or builder funded at no cost to you. Also, it is worth noting again that the remaining amount of the Buydown will be reduced from your payoff. Plus, right now being able to get seller and builder concessions, means the sellers and builders are contributing to your lower interest rate for your first two years of payments.
Back to your “why”
That’s what this is all about, fulfilling your “why”. If you want to move, have established why it is important to do so, and discussed the best options with your family; we want to know what your motivation is so we can fit the best mortgage product for your situation and needs. Right now, it could be a Buydown program!
If it is, our loan officers at First Mortgage Direct will find which Buydown is right for you! We can help navigate contract negotiation to get the appropriate seller concessions as well as help you every step of the way to close on time and feel satisfied that you did the right thing for your why!