TEMPORARY BUYDOWNS SHOULD BE SHOUTED FROM THE ROOFTOPS!
The temporary buydown, in today’s market, is HIGHLY underutilized. When suggested, the seller/buyer are usually asking themselves, “What’s the catch?”
To quote Lew Sichelman of National Mortgage Professional Magazine, “Home builders are using the hell out of mortgage rate buydowns to bring would-be buyers to the table. Individual sellers, not so much…Mortgage brokers, selling agents and buying agents should be shouting temporary buydowns from the rooftops”
Though 1-0 and 3-2-1 buydowns are available, we will be discussing the 2-1 buydown for this article. With a 2-1 buydown, the buyer’s rate is 2% lower than the full rate for the first year of the loan, 1% lower for the second year, then returns to the full rate for year three, with the idea that a refinance might have occurred before this full rate is even reached.
Instead of asking for X amount off the purchase price during negotiations, asking for that same X amount in seller concessions instead, can have a much larger impact on your house payment. See the example below..
Our Gain Mortgage Quant has worked up an example to show how this all goes down:
Home purchase price of $500,000. 20% down payment for a loan amount of $400,000.
The cost for a 2-1 buydown would be ~ $9,000.
The savings to the buyer would be $507 a month for the first 12 months, then $256 a month for the next 12 months.
As an added bonus, if the buyer chooses to refinance before the end of the 24-month period, the balance of the escrowed amount is returned to the buyer.
Had the buyer asked for a $9000 reduction in the purchase price, instead of applying the $9000 to a 2-1 buydown, the savings would equate to just around $46 a month…
To close, we’ll go back to our opening question, “What’s the catch…?” If someone can find one, please let us know!
The real question should be, as Lew Sichelman puts it, ‘why is the temporary buydown not being shouted from the rooftops!’