Temporary Buy Downs: Your Key to Mortgage Savings
Welcome everyone to this week's highly anticipated edition of The Wealth Captain's Weekly Blog! Today, we've got something special on the menu—a deep dive into the complex but incredibly beneficial world of temporary buy downs. I know, it sounds like a technical term only mortgage advisors like myself would be excited about, but trust me, this is a topic that could mean real savings and financial flexibility for you. We're not just scratching the surface here; we're going in-depth, breaking down how temporary buy downs work, why they might be a phenomenal option for certain homebuyers, and all the pros and cons you need to be aware of. Whether you're a seasoned homeowner thinking about a new purchase, or you're just getting your feet wet in the world of real estate, understanding temporary buy downs could be the missing puzzle piece in your mortgage strategy. So, settle in, grab a coffee, and let's unravel this often-overlooked gem in the mortgage world. You definitely won't want to skip this edition. Stay with me, we're just getting started!
What is a Temporary Buy Down?
I've met a ton of people in the real estate and mortgage industry who've heard of "temporary buy downs," but they don't really get what it's all about. So let's clear the air by diving into the big question: What is a temporary buy down, anyway?
At its core, a temporary buy down is a specialized loan program designed to drop your interest rate for a set period. Now, if you want to get a real handle on how this works, it's key to know that this isn't a permanent buy down or an adjustable-rate mortgage (ARM).
Instead, it carves out its own unique space between these two more familiar options.
With a temporary buy down, you get the stability of a fixed-rate mortgage along with a taste of the initial flexibility you'd find in an ARM.
See, a permanent buy down lowers your interest rate for the entire loan term, while an ARM generally starts you off low but adjusts over time with the market. On the other hand, a temporary buy down is a fixed-rate mortgage that gives you a break on the interest rate for a set period. After that, it jumps back to the originally agreed-upon fixed rate and stays there for the life of the loan. Trust me, understanding these nuances can make all the difference in your home-buying journey.
The Mechanics of a Temporary Buy Down
Generally, you've got three main options when it comes to temporary buy downs: the 1/0, the 2/1, and the 3/2/1. The 2/1 tends to steal the spotlight and seems to be the go-to for many. But hang tight, let's break down how each of these options actually works.
The 1/0 buy down drops your interest rate by 1% for the first year. Come month 13, you're looking at paying the full fixed rate for the rest of your loan term.
Next up, the 2/1 buy down. This bad boy slashes your interest rate by 2% for year one and by 1% for year two. Starting on month 25, you'll be settling into your full fixed rate for the remaining loan term.
Finally, let's talk about the 3/2/1. This one lowers your rate by 3% in the first year, 2% in the second year, and 1% in the third year. Then, from month 37 onward, you're locked into your full fixed rate for the rest of your loan.
Let's look at an example of a 2/1 buy down. Let's say you qualify for a rate of 6.5% today. With a 2/1 buy down, your payments will be reduced to a 4.5% interest rate for the first year. Year two bumps you up to a 5.5% rate. And starting on month 25, you'll be rolling with that full fixed-rate of 6.5% for the remainder of the loan term.
Upfront Costs Associated with a Temporary Buy Down
Just like with a permanent buy down, temporary buy downs come with upfront costs. Here's the kicker, though: Unlike a permanent buy down, these costs usually fall on the seller, not you, the buyer. Yep, you heard that right. While you do need the seller to agree when you're hashing out your purchase contract, you're not the one footing the bill for the temporary buy down.
So, how do they calculate these costs? It's straightforward, but can sometimes appear a bit complex. Let me break it down as simply as I can. The cost of the temporary buy down equals the total savings over the term of the temporary buy down. Let's dive into an
example with a 2/1 buy down, shall we?
*Full fixed rate: 6.5% = $3,000 monthly payment.
*Year 1 rate: 4.5% = $2,500 monthly payment ($500 monthly saving for 12 months).
*Year 2 rate: 5.5% = $2,750 monthly payment ($250 monthly saving for 12 months).
*Note: These figures are purely illustrative, okay?
Based on this example, the 2/1 buy down saves you $6,000 in the first year and $3,000 in the second year. So, in this scenario, the seller would be charged $9,000 for the cost of the 2/1 buy down.
Who can really benefit from Temporary Buy Downs
For starters, just about any buyer would benefit from a temporary buy down. I mean, lower monthly payments at the cost of the seller would appeal to anyone looking to buy a house. But let's take a look at just a few specific examples of buyers who can benefit from temporary buy downs.
First Time Home Buyers: Beginning your journey into homeownership can be amazing, scary, exciting, and overwhelming all at the same time. After all, you are taking on many costs as a homeowner that you didn't have or think about as a renter. And starting out your journey with the little extra breathing room provided by a temporary buy down can be a great advantage for a first time home buyer.
Anyone looking to purchase while interest rates are on the higher side: As explained in my weekly market update, buying a home while interest rates are on the higher side can come with its own set of major advantages. If you are a buyer that wants to take advantage of those benefits, then a temporary buy down can further help your situation by allowing you a lower rate for the early portion of your mortgage as you are waiting for rates to come down.
Someone who is expecting a change in their financial situation: If you are looking to buy a home now but are expecting an increase in salary over the next year or two, then a temporary buy down can help get you into the home that you want now with more comfortable payments while you are waiting for that higher income to kick in.
Short term home-ownership: If you are a buyer that is only planning on keeping the home for a short period of time, maybe 1-3 years, then a temporary buy down can afford you a lower interest rate for the time that you are in the home.
Not all Sunshine and Rainbows
It would be irresponsible of me to only talk about the pros and not touch on the cons. While temporary buy downs are generally positive programs with little risk to the buyer, there's one obvious risk I must point out.
When utilizing a temporary buy down, it's crucial to understand that both the interest rate and monthly payment will eventually revert to the full fixed rate. Whatever your reason for opting for a temporary buy down, always make sure you fully understand—and are comfortable with—the worst-case scenario of having to pay that full fixed-rate mortgage payment when the time comes.
Temporary buy downs do not actually have their own qualification requirements. They can be applied to Conventional, FHA, and VA loans. As long as you qualify for the loan itself, then you can apply a temporary buy down to it.
Now, it is important to keep in mind that qualification will be determined without the temporary buy down. This means you will need to qualify for the loan using the full fixed-interest rate, not the discounted temporary buy down rate.
Q: When can I refinance the loan?
A: At any time. Temporary buy downs do not come with their own pre-payment penalty and you do not have to wait until the 1 or 2 or 3 years of reduced payments are up before you can refinance or sell the home.
Q: Do I lose the savings if I refinance or sell before the savings period ends?
A: No, you do not. If you refinance or sell the home before you have realized the full savings then the remainder of the savings will be applied to the loan amount at pay-off.
Q: Are there any specific credit requirements?
A: No, there are no credit requirements specifically tied to the temporary buy downs.
Q: What loan types can I utilize the temporary buy down with?
A: Temporary buy downs can be utilized on Conventional, FHA, and VA loans.
And there you have it, folks—the full scoop on temporary buy downs. We've covered everything from what a temporary buy down actually is, to the nitty-gritty of how it works, the upfront costs, and who can really benefit from it. Temporary buy downs are like the unsung heroes of the mortgage world, giving buyers a little financial cushion just when they need it most. And remember, these are not just for first-time buyers; almost anyone can tap into the benefits. Plus, don't forget, most of the time you're not the one footing the bill—the seller is. So the next time you're in the market for a home, don't overlook this game-changing option. Whether you're a seasoned buyer or just dipping your toes into the waters of home ownership, understanding temporary buy downs could be your ticket to some serious savings and peace of mind. Thanks for sticking with me through another edition of The Wealth Captain's Weekly Blog. Until next time, happy house hunting!
The Wealth Captain
Mortgage Advisor | NMLS#2428833