Temporary Interest Rate Buydowns- What Are They And Why Are They Beneficial?

There are two types of buydown programs: temporary and permanent

.

A permanent buydown is where the borrower or seller pays discount points to the lender to have a lower interest rate for the term of the loan. Often a permanent buydown does not make financial sense due to the amount of time needed in that loan to recoup the costs of the buydown.

A temporary buydown is where the borrower, seller, or lender pre-pays interest for the first one to three years in order to have a lower interest rate. The most common types of temporary buydowns are:

3-2-1 buydown

2-1 buydown

1-0 buydown

With a 3-2-1 buydown...if your note rate is 6.5%, for the first year your interest rate would be 3.5%, 4.5% the second year, 5.5% the third year and 6.5% years four through thirty.

With a 2-1 buydown...if your note rate if 6.5%, for the first year your interest rate would be 4.5%, 5.5% the second year and 6.5% for the remaining years in the term.

With a 1-0 buydown...if your note rate is 6.5%, you would have an interest rate of 5.5% for the first year and 6.5% years two through thirty.

Temporary buydowns have been most commonly used by sellers/ builders that are trying to entice buyers with lower than market interest rates for the first few years resulting in a lower monthly mortgage payment.

Why temporary buydowns and the "No Closing Cost Loan" are perfect together?

If your loan amount is greater than $200,000, we have the ability to use the commission the bank pays us for originating the loan to pay for the buydown cost as well as closing costs. This gives our customers a better than market interest rate at no cost to them. We can continue to refinance at no cost using a buydown program to maintain the lower than market interest rate.

Example:

Customer has a current loan amount of $250,000 with an interest rate of 6.625% on a 30 yr fixed. Current monthly payment is $1600.78.

Based on current market conditions we are able to offer them a no closing cost rate of 6.5% with a one year buydown. This gives them an interest rate of 5.5% for the first year and then the loan converts to a 30 yr fixed at 6.5% after the first year. By refinancing at no cost, they received an interest savings of $2500 in just one year. At the end of the year, they have three options:

1.Keep the loan and maintain the 6.5% interest rate.

2.Refinance again with no closing costs into another one year buydown.

3.Refinance with no closing costs into a different loan product (ARM, 15 yr fixed, etc).

As you can see, using the no closing cost loan along with a temporary buydown provides are customers with several benefits including:

Lower than market interest rate at no cost them resulting in lower monthly payments.

Increased interest savings

A hedge against higher interest rates during periods of economic strength.

Please don't hesitate to contact me at cdecandia@lenderforlife.net for an analysis of whether a temporary buydown would be beneficial for you.

by: Cari DeCandia

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