For a seller, offering a temporary rate buydown is a great way to entice potential buyers. As a win-win, a buydown is a great tool for buyers in today’s rate environment. There are two main types of buydowns, either a 2-1 or a 3-2-1. On a 2-1 buydown the interest rate in year 1 of the loan is reduced by 2% and by 1% in the second year. For a 3-2-1 the rate is reduced by 3% in year 1, 2% in year 2, and 1% in year 3 of the loan.
How impactful is this to payments? On a 3-2-1, for a $400,000 loan amount, the payment in year 1 is reduced by $751.55/month! $513.92 for year two and $263.01 in year 3. This makes a tremendous difference in affordability.
Here’s the kicker….points paid up front by a Buyer to permanently buy down a rate on a standard transaction are lost when a consumer refinances. Most everyone in the industry expects rates to be lower inside the next 24 months and refinance activity will be robust. All those funds paid in points will be lost.
With a temporary rate buydown, however, the excess funds are NOT lost. Those funds are used to REDUCE the loan amount when a consumer refinances into a lower fixed rate. This is a major advantage to the consumer. Again, this is an amazing opportunity to “Marry the house and date the rate”.
Knowing the proper structure using this tool will greatly reduce Days on Market (DOM) for sellers and keep hesitant buyers motivated and ready to pull the trigger!