Your Guide To Help You Select The Correct Buydown Program
Hello,
If you're a buyer trying to purchase in today's market, you might have heard of a "rate buydown." But, you might be like most consumers with how they work, which one to select and why it would benefit you and your family.
What Is a Buydown?
A buydown is a mortgage financing technique with which the buyer attempts to obtain a lower interest rate for at least the first few years of the mortgage or possibly its entire life.
TEMPORARY BUYDOWNS
3-2-1 Buydown?
In a 3-2-1 buydown, the buyer pays lower payments on the loan for the first three years. For each of the first three years of the mortgage, the buyer's interest rate would increase incrementally by 1% annually. The total interest rate would apply beginning with the fourth year of the mortgage loan. While the buyer received savings from the lower interest rate in the first three years, the difference in the payments would have been made by the seller to the lender as a subsidy.
2-1 Buydown?
A 2-1 buydown is structured the same as a 3-2-1 buydown; however, its discount is only available for the first two years. So you would have a 2% interest rate reduction for the first year of the mortgage, then a 1% discount for the second year. Your interest rate and monthly payments would increase until your loan reaches its actual percentage rate. This happens in year three of the loan. At this point, your monthly mortgage payment would reflect the real loan rate. You would pay upfront for the 2-1 buydown at closing; theoretically, the money you save over the first two years would cancel that payment.
1-0 Buydown?
A 1-0 Buydown is a temporary buydown where the start rate and first year payment are based on a rate that is one percent below the note rate. Example - if your note rate is 5.5%, then your first year start rate would be 4.5%. The second year and all remaining years would be based on your note rate.
1-1- Buydown?
A 1-1 Buydown is a temporary buydown where your payment is based on a rate that is one percent below your note rate for the first two years of the loan, and the third and remaining years payments are based on your note rate. Example if your note rate is 5.5%, then your first year payment is based on 4.5%, second year payment is also based on 4.5%, and then the third and remaining years are based on the note rate in this case of 5.5%.
Temp Buydown Pros and Cons
Whether it makes sense to use a buydown to purchase a home can depend on several things, including the amount of the mortgage, your initial interest rate, the amount you could save in interest over the initial loan term, and your estimated future income. How long you plan to stay in the home also can come into play in determining your break-even point.
Pros
* A buydown temporarily reduces your interest rate, saving money and lowering your monthly payments during the initial loan term.
* Choosing a buydown may allow you to pay less for the home than the seller's listing price.
* It could make sense for homebuyers whose income will increase in the years to come.
* With a temporary buydown if you were to refinance before the buydown funds are used, the remainder of those unused buydown funds are credited back to the Client in the form of a principal reduction on the loan balance. With rates likely to drop in the next 6, 12, 18 months, this is a powerful PRO right now.
Cons
* Once the buydown rate ends, your monthly payment could be higher than expected.
* You could struggle with monthly mortgage payments if your income doesn't increase and if rates don't drop in the coming years.
PERMANENT BUYDOWN
Just as the name indicates, the rate is bought down permanently so there are no adjustments - if the going fixed rate is say 6.5% and that rate is permanently bought down to 5.5%, then your payment is always based on that fixed rate - there are no adjustments.
PROS
* There are no payment adjustments
* Can help with qualification in many cases or to increase buying power, as you will qualify off of that permanent rate, wheras with the temporary buydown you qualify off of the note rate even though the start rate can be much lower than that.
CONS
* If rates drop below your bought down rate and you refinance, the funds used to permanently buydown that rate are lost. With rates likely to do just this in the next few years this is a big con of a permanent buydown as compared to a temporary buydown.
* They are usually more expensive than temporary buydowns - sometimes this is a non issue and sometimes this is a big issue - every case is unique.
So Which Concession Gets You The Most Bang For Your Buck?
Between asking for a price reduction, temporary buydown, permanent buydown, or closing costs to be paid - which one makes the most sense for you? Our no nonsense report on the right side of this page shows you which option gives you the most bang for your buck depending on what your goal is! Best practice is to get your specific analysis and cost vs benefit structure report as everyone's case is unique. We do these for free for our clients so just reach out!
....................................................................................................................................................................................................................
Attn: Realtors
Buydowns for Open Houses: Do you have an Open House Coming Soon?
If so, let's get Buydown options out to potential buyers ( see PDF Flyer attached )
You can view the Open House Property here - https://joewiggins.lenderlaunchpad.com/listing/15645-saddleback-rd-riverside-ca-92506
Buyer Motivation: Do you have Buyers that have left the market until the following year?
If so, I have built an excellent presentation explaining why I think it's a great time to purchase now vs. next year.
You can view that here -
If you're a buyer trying to purchase in today's market, you might have heard of a "rate buydown." But, you might be like most consumers with how they work, which one to select and why it would benefit you and your family.
What Is a Buydown?
A buydown is a mortgage financing technique with which the buyer attempts to obtain a lower interest rate for at least the first few years of the mortgage or possibly its entire life.
TEMPORARY BUYDOWNS
3-2-1 Buydown?
In a 3-2-1 buydown, the buyer pays lower payments on the loan for the first three years. For each of the first three years of the mortgage, the buyer's interest rate would increase incrementally by 1% annually. The total interest rate would apply beginning with the fourth year of the mortgage loan. While the buyer received savings from the lower interest rate in the first three years, the difference in the payments would have been made by the seller to the lender as a subsidy.
2-1 Buydown?
A 2-1 buydown is structured the same as a 3-2-1 buydown; however, its discount is only available for the first two years. So you would have a 2% interest rate reduction for the first year of the mortgage, then a 1% discount for the second year. Your interest rate and monthly payments would increase until your loan reaches its actual percentage rate. This happens in year three of the loan. At this point, your monthly mortgage payment would reflect the real loan rate. You would pay upfront for the 2-1 buydown at closing; theoretically, the money you save over the first two years would cancel that payment.
1-0 Buydown?
A 1-0 Buydown is a temporary buydown where the start rate and first year payment are based on a rate that is one percent below the note rate. Example - if your note rate is 5.5%, then your first year start rate would be 4.5%. The second year and all remaining years would be based on your note rate.
1-1- Buydown?
A 1-1 Buydown is a temporary buydown where your payment is based on a rate that is one percent below your note rate for the first two years of the loan, and the third and remaining years payments are based on your note rate. Example if your note rate is 5.5%, then your first year payment is based on 4.5%, second year payment is also based on 4.5%, and then the third and remaining years are based on the note rate in this case of 5.5%.
Temp Buydown Pros and Cons
Whether it makes sense to use a buydown to purchase a home can depend on several things, including the amount of the mortgage, your initial interest rate, the amount you could save in interest over the initial loan term, and your estimated future income. How long you plan to stay in the home also can come into play in determining your break-even point.
Pros
* A buydown temporarily reduces your interest rate, saving money and lowering your monthly payments during the initial loan term.
* Choosing a buydown may allow you to pay less for the home than the seller's listing price.
* It could make sense for homebuyers whose income will increase in the years to come.
* With a temporary buydown if you were to refinance before the buydown funds are used, the remainder of those unused buydown funds are credited back to the Client in the form of a principal reduction on the loan balance. With rates likely to drop in the next 6, 12, 18 months, this is a powerful PRO right now.
Cons
* Once the buydown rate ends, your monthly payment could be higher than expected.
* You could struggle with monthly mortgage payments if your income doesn't increase and if rates don't drop in the coming years.
PERMANENT BUYDOWN
Just as the name indicates, the rate is bought down permanently so there are no adjustments - if the going fixed rate is say 6.5% and that rate is permanently bought down to 5.5%, then your payment is always based on that fixed rate - there are no adjustments.
PROS
* There are no payment adjustments
* Can help with qualification in many cases or to increase buying power, as you will qualify off of that permanent rate, wheras with the temporary buydown you qualify off of the note rate even though the start rate can be much lower than that.
CONS
* If rates drop below your bought down rate and you refinance, the funds used to permanently buydown that rate are lost. With rates likely to do just this in the next few years this is a big con of a permanent buydown as compared to a temporary buydown.
* They are usually more expensive than temporary buydowns - sometimes this is a non issue and sometimes this is a big issue - every case is unique.
So Which Concession Gets You The Most Bang For Your Buck?
Between asking for a price reduction, temporary buydown, permanent buydown, or closing costs to be paid - which one makes the most sense for you? Our no nonsense report on the right side of this page shows you which option gives you the most bang for your buck depending on what your goal is! Best practice is to get your specific analysis and cost vs benefit structure report as everyone's case is unique. We do these for free for our clients so just reach out!
....................................................................................................................................................................................................................
Attn: Realtors
Buydowns for Open Houses: Do you have an Open House Coming Soon?
If so, let's get Buydown options out to potential buyers ( see PDF Flyer attached )
You can view the Open House Property here - https://joewiggins.lenderlaunchpad.com/listing/15645-saddleback-rd-riverside-ca-92506
Buyer Motivation: Do you have Buyers that have left the market until the following year?
If so, I have built an excellent presentation explaining why I think it's a great time to purchase now vs. next year.
You can view that here -