Temporary rate buydowns can save homebuyers from high interest rates
Don’t Wait for Lower Rates. Get a Temporary Rate Buydown
Lower interest rates lead to higher purchase prices for homes. What if you could buy before prices go up and refinance when rates go down? You can! Mortgage payments can be harder to handle while rates are higher, but there is a solution. A temporary rate buydown can make payments lower until the inevitable refinance.
How Do They Work?
Temporary rate buydowns lower the interest rate you are making mortgage payments on for your first few years of payments. Once the temporary rate buydown is over you go back to the normal fixed market rate you would have had before the temporary rate buydown. This means there isn’t a downside or risk to having a temporary rate buydown. It leads to hundreds of dollars off of each mortgage payment for the first few years. That lower payment will give the buyer time to wait for rates to come down. Once rates are lower you can still refinance to a lower interest rate. Any remaining unused credits pay down the principal on the new loan you get in a refinance.
How Do You Get One?
Temporary rate buydowns require seller credits. The seller pays the cost of the temporary rate buydown, and the credit amount is a dollar for dollar reduction in payments that the buyer will not make in the first few years. This works out for sellers the same as if they had a lower price and it allows buyers to avoid higher rates and have comfortable payments once they are a homeowner. Everyone wins. A loan officer will be able to tell you exactly what amount of credits are needed for a temporary rate buydown.
Example: A $500k purchase price will lead to the same amount of money received by the seller as a $515k purchase price and a $15k credit to the buyer. The buyer will have far lower payments with the higher price and temporary rate buydown than if they just had the lower purchase price!
Why Not a Normal Buydown or Paying Discount Points for a Lower Rate?
Normal rate buydowns, also known as paying discount points, are great if you will be in the mortgage long term. The buyer pays an upfront fee to get a lower rate and benefits from lower payments over the life of the loan. However in rate environments such as the one in 2024, most predictions expect rate cuts and lower rates in the near future. Most homebuyers today will not be in their current mortgage for more than a few years. The lower payments need to at least cover the upfront fee to make sense, otherwise that cost is wasted and unnecessary. Be sure to compare the cost of discount points to your monthly savings and see how long you would be in your first mortgage before refinancing. A loan officer can quickly give you a break even analysis, and also compare discount points to other options to lower payments.
