With mortgage interest rates so high, many potential home buyers are waiting on the sidelines to jump into the market. In an effort to encourage buyers to purchase homes, sellers and builders are again beginning to offer mortgage buydowns.
What are mortgage buydowns?
Using a mortgage buydown can help ease first-time home buyers into their new mortgage payments.
Mortgage buydowns are a tool that sellers and buyers can utilize to help combat high-interest rates. There are permanent buydowns, where the buyer can put down more money upfront to lock in a lower interest rate, but there are temporary ones available where it’s the seller who puts money down upfront to help lower the interest rate for 1 to 3 years, not the entire period of the loan.
The seller will give the buyer’s lender a set amount of money to “lower” the buyer’s monthly payment for 12-36 months. This gives the buyers time to buy their home, and rent their rate.
Most commonly, you’ll see this done as a 2-1 buydown or 3-2-1 buydown. With a 2-1 buydown, the seller provides the buyer’s lender with enough money to lower the first year’s monthly mortgage rate by 2%. For the second year, the mortgage rate would only be reduced by 1% and then returned to its regular rate the third year and beyond. A 3-2-1 buydown follows the same principle, just for an additional year.
By using temporary buydowns, buyers can ease into the mortgage-paying process, which can be quite a shock, especially during high-interest rate periods, like we are experiencing now. It also leaves buyers with a little bit more money each month for the first few years to help them buy furniture, make repairs, or increase their savings.
Why does the seller just not make the price lower?
Good question. By utilizing a temporary mortgage buydown like this, the buyer is treated to more immediate, short-term benefits, like a lower monthly payment for the next few years. When it is the overall price of the home is lowered, the savings is evenly distributed over the entire period of the loan. This makes the effects of the savings very minimal in the short term.
Will this make qualifying easier too?
No. Remember what happened in 2008? Homeowners qualifying for homes with similar incentives only to be hit with extremely high-interest rates later on that they couldn’t afford? Mortgage buydowns are protected by strict regulations now to help prevent this.
Even if the seller offers a temporary buydown, you must still qualify for the original interest rate. It should be at a rate you feel comfortable paying and the lower payments for the introductory phase should be seen as a bonus. You should not approach a temporary mortgage buydown with the assumption you will be able to refinance to a lower rate in the future or that you will be making a higher salary by then.
