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Your Guide To Selecting The Correct Buydown Program
Hello,
If you're a buyer trying to purchase in today's market, you might have heard of a "rate buydown." But, you might be like most consumers with how they work, which one to select and why it would benefit you and your family.
What Is a Buydown?
A buydown is a mortgage financing technique with which the buyer attempts to obtain a lower interest rate for at least the first few years of the mortgage or possibly its entire life. This can be accomplished by negotiating funds from the seller OR you can add to the purchase price by a certain amount and then the seller credits that amount back to you for the rate buy down. There are specific reasons you'd consider either of these options. I'm happy to discuss further the reasons, and strategy, for each of these with you.
3-2-1 Buydown?
In a 3-2-1 buydown, the buyer pays lower payments on the loan for the first three years. For each of the first three years of the mortgage, the buyer's interest rate would increase incrementally by 1% annually. The total interest rate would apply beginning with the fourth year of the mortgage loan. While the buyer received savings from the lower interest rate in the first three years, the difference in the payments would have been made by the seller to the lender as a subsidy.
2-1 Buydown?
A 2-1 buydown is structured the same as a 3-2-1 buydown; however, its discount is only available for the first two years. So you would have a 2% interest rate reduction for the first year of the mortgage, then a 1% discount for the second year. Your interest rate and monthly payments would increase until your loan reaches its actual percentage rate. This happens in year three of the loan. At this point, your monthly mortgage payment would reflect the real loan rate. You would pay upfront for the 2-1 buydown at closing; theoretically, the money you save over the first two years would cancel that payment.
Temp Buydown Pros and Cons
Whether it makes sense to use a buydown to purchase a home can depend on several things, including the amount of the mortgage, your initial interest rate, the amount you could save in interest over the initial loan term, and your estimated future income. How long you plan to stay in the home also can come into play in determining your break-even point.
Pros
* A buydown temporarily reduces your interest rate, saving money and lowering your monthly payments during the initial loan term.
* Choosing a buydown may allow you to pay less for the home than the seller's listing price.
* It could make sense for homebuyers whose income will increase in the years to come.
Cons
* Once the buydown rate ends, your monthly payment could be higher than expected.
* You could struggle with monthly mortgage payments if your income doesn't increase.
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Attn: Realtors
Buydowns for Open Houses and Listings: Do you have an Open House or a Listing Coming Soon?
If so, let's get Buydown options out to potential Buyers and Buyer's Agents
You can view a Property Listing w/ financial presentation we did for a partner here -
https://brentwillis.lenderlaunchpad.com/listing/522a-e-bend-drive-nashville-tn-37209
Buyer Motivation: Do you have Buyers that have left the market, waiting until the following year?
If so, I have built an excellent presentation explaining why I think it's a great time to purchase now vs. next year.
You can view that here: