Buydown: An Overview
In the current high-interest rate environment, a buydown is becoming an increasingly popular solution for selling homes. If you're not familiar with a buydown or have questions about it, let's delve into the details. Remember, to get accurate information for your personal situation, consult your trusted mortgage broker.
Permanent Buydown:
Definition: These are payments made to reduce a borrower's interest rate permanently. They are also known as points, origination fees, discount points, or lender fees.
Mechanism: These payments compensate the lender upfront for the lost commission from selling a loan with a lower interest rate. The costs can be covered by either the buyer or the seller.
Advice: There may be a better option for you than a Permanent Buydown. Read on for more.
Temporary Buydown:
Definition: These buydowns involve setting up an escrow account for the buyer, without any fees going to the lender. The account is generally funded by the Seller.
Mechanism: Consider a borrower with a $500,000 loan at a 7% rate and a 3-2-1 buydown:
Year 1: The buyer pays $2,387/month, while the seller-funded escrow account covers $939/month.
Years 2 & 3: The buyer's payments increase, and the seller-funded account covers less.
Benefit: If the buyer refinances in the 13th month, any remaining funds in the escrow account reduce their principal balance.
Key Point: No money goes to the lender; all the benefits go to the buyer.
Potential Pitfalls:
Issue: Buyers may only consider the Year 1 payment and fail to budget for higher payments in subsequent years.
Solution: We ensure that buyers qualify at the highest possible payment, preparing them for future financial obligations. This approach allows for potential wage increases and interest rate drops, enabling refinancing without losing benefits.
Need More Information?
If you’d like to learn more about the value of a buydown in the home purchase process, let’s talk.
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