When getting a mortgage (either buying or refinancing), you have the option of buying down the interest rate.
With the traditional buy down program, you pay a lump sum up front (called points or discount fee) to get a lower interest rate. Technically, you are paying some of the interest upfront for a lower monthly interest rate.
But now there is a twist on the buydown that could make sense for some buyers.
Most first time buyers are not purchasing their dream home right from the start. They stay in their home for a few years, watch the value go up, then sell and purchase a better home. If this is you, then consider the new Temporary Buydown.
What is a Temporary Buydown?
The temporary buydown lowers the interest rate on the first two years’ payments, not on the entire 30 years. Thus, your interest rate is reduced more initially than it would have been. (See example below.)
When you’re not going to keep the property for 30 years anyway, then why not use the money where you really need it the most, those first couple years?
The Seller Can Pay for Your Buydown
More good news: the seller can contribute to the buydown fee. Your real estate agent will add a Seller Concession to the Purchase & Sale Agreement. Then tell your loan officer that you want to spend it on the Temporary Buydown, not on any other closing costs and not to buy down the rate for 30 years.
This brings us to a potential “catch.” If you are short on cash to close, then you will need to use the Seller Concession for your normal closing fees rather than buying down your rate.
You and your loan officer should add up the monthly savings for the first 24 months of the loan, then compare that to the cost of the buydown. That way, you will see whether or not it makes sense for you.
Example of the Temporary Buydown
You might use the buydown like this:
If the rate on a 30-year fixed rate is 5.25%, then your first year would be 3.25% and the second year 4.25%. This gives you a significantly lower payment for the first two years of your loan. Starting on the third year, the rate would be 5.25% and stay there for the life of the loan.
How to Get the Temporary Buydown
You can get the Temporary Buydown program through your mortgage broker who will shop wholesale lenders to find you the best pricing. United Wholesale Mortgage is a national wholesale lender that offers this program.
As always, thank you for reading my blog. I do my best to inform people on ways to save money on their mortgages.