The buy-down is extremely popular right now. Higher mortgage rates eat into affordability and push buyers out of the market. As a result, sellers are having to negotiate more. Often, that includes throwing in cash to reduce the buyer’s interest rate — either temporarily or for the entire loan term.
A buy-down is essentially an upfront payment of interest to the lender. Most lenders are compensated through some combination of fees they charge to a borrower and the backend premium they make on the interest rate. When a borrower pays more of the lender’s compensation out of pocket, it allows the lender to sell the borrower a lower rate. . Sellers, builders, lenders and even real estate agents can contribute toward buy-downs.
Rate buy-downs can be temporary, lasting just a few years, or permanent. With the latter, you get a reduced rate and monthly payment for your entire loan term — or until you sell or refinance.
Permanent versus Temporary Buy-down
In the mortgage world, permanent rate buy-downs are most often called “buying points.” You (or another party) will pay an upfront fee to reduce your interest rate incrementally — typically between 0.125 to 0.50 percentage points. The exact price for this varies, but it’s usually anywhere from 0.375% to 1% of the total loan balance. However, buyer beware, the cost of a rate buy-down is not one-size-fits-all. It varies from originator to originator, and it’s also driven by product selection, market factors and end-investor guidelines.
With the rise in interest rates over the past several months, rate buy-downs have become an increasingly popular way for buyers to regain buying power. For example, a borrower with a $1500 per month housing budget quoted an interest rate of 7% has a maximum qualifying purchase price of $225,000, whereas a .75% rate reduction to 6.25% will increase your home purchasing power by nearly $20,000.
There are also temporary rate buy-downs, which give buyers a lower rate for the first few years of the loan, and then revert to the original quoted rate. There are two types of temporary buy-downs – The seller and lender-funded buy-down. With the seller- funded method, the seller contributes a lump sum at closing, which is put in the buyer’s escrow account. Those funds are used to cover a portion of the buyer’s mortgage payments for up to three years. The lender is still charging the same rate. It’s just coming from a different source — part of it’s being paid by the seller and part of it by the buyer.
The three versions of the temporary buy-down are the 1-0, the 2-1, and the 3-2-1 buy-down. The 1-0 buy-down reduces the borrower’s interest rate by one percentage point for the first year. The borrower pays the note rate for the remaining loan term. The 2/1 buy-down allows the consumer to have a rate 2% lower the first year of the loan and a 1% less for the second year. The 3-2-1 buy-down, lowers the rate an additional percentage point for the first year and follows the same 1% annual increase as the 2-1 buy-down option. Once the loan hits the third year — and for every year beyond — the borrower will pay the original rate and payment they were quoted for. A important point to remember concerning the temporary buy-down is that you’ll need to qualify based on the note rate – The final rate payment, not the reduced one.
Each of our JESCOPR FUNDING associates is qualified to review your specific needs to help you determine the right buy-don option for you. Feel free to contact us at (888) 922-5989 for more information or send us a reply below. One of our associates will get back to you promptly.
