It seems like everywhere homebuyers look these days, they’re seeing something about the high interest rates in the mortgage industry.
It’s true that rates are higher than the all-time lows they reached in recent years. Many economic experts are also predicting that there will be more increases in the federal interest rate – the rate at which banks and other depository institutions lend money to each other, usually on an overnight basis – which can send mortgage rates moving in the same direction.
Trying to time the prevailing mortgage rate to be ideal for your personal situation can be difficult if not impossible. Sure, it would be great if rates were in the 2s every time you wanted or needed to buy a home.
At the moment, they’re not. But if you’re currently in the market for a new home, there’s good news.
You can try these ways to get a great rate when rates are rising. You can also consider a Temporary Buydown and enjoy reduced payments at the beginning of your Conventional Conforming, FHA, VA, or Jumbo mortgage.
What is a Temporary Buydown?
A Temporary Buydown is a financing technique where money is paid at closing and set in an escrow account, temporarily reducing the effective interest rate and lowering the monthly mortgage payment. With the escrow account funded by the seller or your builder, you can save thousands of dollars during the first year or two of owning your new home.
- A 3-2-1 Temporary Buydown will reduce the interest rate 3% the first year, 2% the second year, and 1% the third year, returning to the full rate the fourth year (available on Conventional Conforming loans only).
- A 2-1 Temporary Buydown will reduce the interest rate 2% the first year and 1% the second year, returning to the full rate the third year.
- A 1-0 Temporary Buydown will reduce the rate 1% the first year and return to the full rate the second year.
Here’s an illustration of a 3-2-1 Temporary Buydown based on a $500,000 home price/$450,000 loan amount (10% down) with a 7.250% interest rate (7.378% APR*):
YEAR ONE
- The first 12 monthly buydown payments would be reduced to $2,213.73
- Buydown: 4.250% (3% rate reduction, 4.356% APR*) for 12 months
- $856.06 savings per month, $10,272.72 savings for the year
YEAR TWO
- The second 12 monthly buydown payments would be reduced to $2,484.92
- Buydown: 5.250% (2% rate reduction, 5.365% APR*) for 12 months
- $584.87 savings per month, $7,018.44 savings for the year
YEAR THREE
- The third 12 monthly buydown payments would be reduced to $2,770.73
- Buydown: 6.250% (1% rate reduction, 6.370% APR*) for 12 months
- $299.06 savings per month, $3,588.72 savings for the year
YEAR FOUR
- Once the three-year buydown period has expired, the full monthly payment** for the remaining 27 years of the term becomes $3,069.79
- Mortgage Interest Rate: 7.250%/7.378 APR*
Total payment savings in this 3-2-1 Temporary Buydown example: $20,879.88
Remember, as the buyer, you cannot pay for the buydown yourself (the seller or your builder must pay for it), and you must qualify for the loan at the full note rate, not the lower buydown rate. But if you meet all the criteria, a Temporary Buydown offers another way to make buying a home more affordable in a high-rate environment.
Contact a Homeowners Licensed Mortgage Professional today to see if a Temporary Buydown is right for you!
* Annual Percentage Rate (APR) current as of current as of 10/26/2022 is subject to change daily without notice, and assumes a minimum FICO score of 620, no HOA fees, and a maximum debt-to-income ratio of 43% on a single-family residence.
** The default payment calculations above are based on a 10% down payment for a conventional conforming 30-year fixed-rate amortization. Payments listed do not include property taxes, homeowners insurance, or mortgage insurance. Rates shown here are arbitrary and do not constitute an advertisement or offer to lend.
