Temporary rate buydowns may help you qualify for your mortgage

November 07th, 2011

Temporary buydowns are once again being used as a means for helping prospective homebuyers qualify for their mortgages, by offering a lower introductory home loan rate.

What is a temporary buydown?

A temporary buydown lowers the home loan rate at the very beginning of a 30 year fixed rate mortgage, typically by one percent per year during the introductory one year (1-1 buydown), two year (2-1 buydown), or even three year (3-2-1 buydown) introductory period. This marginally lowers the income requirement used to qualify for a mortgage, potentially making a just-out-of-reach loan possible.

Temporary buydowns are typically recommended to prospective borrowers who are just above the qualifying debt-to-income ratio for their new loan. Buydowns may also be considered to help hedge against expectations of substantially rising mortgage rates, particularly if you are in a job with guaranteed future raises under contract, but slightly insufficient current income. In addition, home builders or sellers may offer to pay for buydowns as an incentive to prospective home buyers.

How can a temporary buydown help me?

To see how a temporary buydown may affect your monthly payments, use a mortgage payment calculator. Enter your loan amount and the introductory buydown rate and note the payment, then change the buydown rate to the final rate and note the payment. The difference in payments is how much less you'll pay each month during that year of the buydown period.

For example, on a $300,000 mortgage with 2-1 buydown rates of 3% (year one), 4% (year two), and 5% (years 3-30), the beginning monthly payment at 3% is $1,265 per month. In year two the payment at 4% is $1,432 per month, and the remaining payment is $1,610 per month at 5%. In the past, you qualified at the lower payment; now FHA qualifies you at the year 2 payment. When shopping for a mortgage, ask about qualifying with a buydown. You might be better off with a hybrid ARM fixed for 3, 5, 7, or 10 years because you qualify at a start rate that could be as much as 2% lower than rates on 30-year fixed loans.

What does a temporary buydown cost me?

A temporary buydown might require you to pay either percentage "points" of your mortgage upfront at closing. Alternatively, a "lender funded buydown" pays for the lower mortgage rates in the initial years with a higher home loan rate during the remaining years.

Check with your mortgage professional for your actual available home loan rate and fees. Then use your mortgage payment calculator to see if a temporary buydown might help you finance your home.

Posted By :

Dennis is co-owner and broker of record for Stratis Financial in Southern California. With over twenty years experience in the mortgage industry he has helped thousands families purchase homes. His Weekly Rate and Market Update keeps his clients and real estate professionals educated and informed on the mortgage industry and the economy. Dennis has a degree in Economics and Political Studies from Pitzer College and is married with two children.

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