Temporary Mortgage Interest Rate Buydowns, aka “Buydowns”
In competitive purchase markets and during times of rising interest rates sellers of homes whether a builder or individual homeowner have elected in the past to advertise and/or offer purchasers/borrowers a break on their interest rates during a period - usually the first two years. The 2-1 Buy-down basically provides a Two percent discount on the amount of interest paid by the borrower for the first year and a One percent discount for the second. In the third year the note rate would be fully paid by the borrower through the remaining life of the loan. Let’s examine an example of how such a loan is structured and paid:
Loan Amount: $450,000 30-year term
Base Mortgage payment @4.5%: $2,280.08
Mortgage payment first year @2.5%: $1,778.04 First year interest discount: $6,024.47
Mortgage payment second year @3.5%: $2,020.70 Second yr. interest discount: $3,112.59
Total interest discount: $9,137.07
Cost in Basis points: 2.03 points
Hence, with the above example the borrower would pay $502.04 less per month in mortgage payments for the first year and $259.38 less per month during the second year. The total discount for the first two years amounts to $9,137.07 or 2.03 points ((9137/450000)*100=2.03) This discount contribution amount is below the maximum contribution level for all LTV levels and can be sold to the agencies.
A few key items to remember however is that the borrower still needs to qualify for the loan at the note rate level – in the above example at 4.5%, and only owner occupied and second homes intent purposes apply.
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