If you are a potential homebuyer (or you know one) and are freaked out by rising interest rates, you may have another option. As lenders, we have been using what is called a temporary buydown. What this means is that you can buy down your interest rate on a temporary basis. At the time of writing this, we are currently seeing this being able to be done for 1, 2, and even 3 years.
The best part is this is not something that you pay for, actually you as the buyer are not allowed to pay for it. The seller, the builder, or the Real Estate agent are the only ones who can front the cash for this. So how does it work? Well, depending on how long you choose, the rate goes down 1% for each year, and then gradually rises by 1% until you get to your full locked interest rate. So for example, you choose a 2/1 buydown, and your fully locked rate is 7%. In this instance, the first year would be 5%, the second year would be 6% and then the third year you would be at your fully locked rate of 7%.
This is different than a permanent buydown, where you pay discount points to lower your rate for the term of your loan, and it is often less expensive. The main difference is that a permanent buydown is an origination charge on your loan, that you or the seller can pay. The temporary buydown subsidizes your loan and goes into an escrow account, and every month the funds are pulled from that escrow account to subsidize your full loan payment (principal and interest). Now let’s say you do a permanent buydown and a year goes by, rates have gone down, and you decide to refinance. Well, that origination charge is now lost, and cannot be recovered, but if you did a temporary buydown, any funds leftover in the escrow account can now be used to pay down the principal balance of your mortgage.
So what’s my conclusion? If you are gambling on interest rates going down in the next year or so, then I would choose the temporary buydown, so that you can refinance and get to keep any leftover funds. But if you are not the gambling type, and feel more comfortable with a permanent buydown in your mortgage then go for that. Every situation is different, and I would love the opportunity to discuss your personal situation.
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